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Summer 2018

ISSN 0890-913X

Volume 33, Number 2

Monetary Misperception, Rational Expectations, and the Austrian Theory of the Business Cycle

G. P. Manish, Troy University

Robert P. Murphy, Texas Tech University

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TheJournalofPrivateEnterprise33(2),2018,83–96MonetaryMisperception,RationalExpectations,andtheAustrianTheoryoftheBusinessCycleG.P.ManishTroyUniversityRobertP.MurphyTexasTechUniversity____________________________________________________AbstractSalterandLuther(2016)arguethatAustrianbusinesscycletheorycanbeinterpretedasonewhereconsumersandentrepreneurswithrationalexpectationsmakeerroneousinvestmentdecisionsdrivenbymisperceptionsregardingrealvs.nominalshocks.Althoughwearesympathetictotheirindividualpoints,inthispaperwecriticizetheiroverallstanceontwogrounds.First,wearguethattheirLucasianapproachtotheboomtreatsmoneyasamereveil,ignoringthe“drivingforceofmoney”thatMisesemphasized.Second,wecriticizetheiranalysisofthebustonthegroundsthattheirmodellacksacapitalstructure.AlthoughtheirdiscussionoftheintertemporalproductionpossibilitiesfrontierisarguablyanimprovementonGarrison’streatment,wearguethatbyneglectingthetimestructureofproduction,theirmodelisunabletogenerateabustsimilartothatputforthbythetraditionalABCTthatinvolvesasignificantreallocationofresourcesandthatleavestheeconomypermanentlypoorer.______________________________________________________JELCodes:B53,E13,E14,E32Keywords:Austrianbusinesscycletheory,rationalexpectations,capitalstructure,moneyneutralityI.IntroductionSalterandLuther(2016)arguethattheycanrecastthetraditionalAustrianbusinesscycletheory(ABCT)withinatheoreticalframeworkwhereagentsmaintainrationalexpectationsduringtheboomperiodandwhereequilibriumalwaysprevailsduringthebust.Inthisrespect,theybuildonthepioneeringworkofRobertLucas(1972,1973,1975)tomeetthestandard“rationalexpectations”objectiontotraditionalABCT,aswellastorenderABCTmorepalatabletoneoclassicalcolleagues.

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Title	Monetary Misperception, Rational Expectations, and the Austrian Theory of the Business Cycle
Authors/Creators:	G. P. Manish, Troy University Robert P. Murphy, Texas Tech University
Year:	2018
Volume:	33
Number:	2
Pages:	83 - 96
Publisher:	The Association of Private Enterprise Education
ISSN:	0890-913X
Document Type:	Articles
Keywords:	Austrian business cycle theory, rational expectations, capital structure, money neutrality

Citation:
Manish, G. P.; Murphy, Robert P. / 2018. "Monetary Misperception, Rational Expectations, and the Austrian Theory of the Business Cycle." The Journal of Private Enterprise, 33(2): 83-96.