Austrian economics: application on Norwegian business cycles

Abstract

This paper reviews the key elements of Austrian macroeconomics and aims to find out whether the Austrian business cycle theory can explain causes to Norwegian business cycles between 1979 and 2009. The Austrian school suggests that monetary interventions disturb the term structure of interest rates. This causes the capital structure to change which accounts for fluctuations of the business cycle. Credit- induced expansions with unchanged time-preferences create unsustainable growth which inevitably turns the economy into recession. Quarterly time series data of base money supply, interest rates, investment and private consumption expenditure, employment, prices, and aggregate output are analysed in order to find relationships with assumptions of causality. Empirical evidence show that Austrian business cycle theory can help explain fluctuations in aggregate output for Norway.