Austrian Business Cycle Theory and Its Application to Economy of Euro Area

• Název práce v češtině: Rakouská teorie hospodářských cyklů a její aplikace na ekonomiku eurozóny
• Název v anglickém jazyce: Austrian Business Cycle Theory and Its Application to Economy of Euro Area
• Akademický rok vypsání: 2017/2018
• Typ práce: diplomová práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: PhDr. Michal Hlaváček, Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 14.06.2018
• Datum zadání: 14.06.2018
• Datum a čas obhajoby: 19.06.2019 09:00
• Místo konání obhajoby: Opletalova - Opletalova 26, O314, Opletalova - místn. č. 314
• Datum odevzdání elektronické podoby: 10.05.2019
• Datum proběhlé obhajoby: 19.06.2019
• Oponenti: PhDr. Jiří Schwarz, Ph.D.

Seznam odborné literatury

BISMANS, F. & C. MOUGEOT (2009): “Austrian Business Cycle Theory: Empirical Evidence.” The Review
of Austrian Economics 22(3): pp. 241–257

DE SOTO, J.H. de (2006): Money, Bank Credit, and Economic Cycles. Auburn: Ludwig von Mises Institute

GARRISON, R.W. (2001): Time and Money: The Macroeconomics of Capital Structure. London: Routledge

HAYEK, F.A. (1975): Monetary Theory and Trade Cycle. Clifton: Augustus M. Kelly Publishers

KEELER, J.K. (2001): “Empirical Evidence on the Austrian Business Cycle Theory.” The Review of Austrian Economics 14(4): pp. 331-351

MISES, L. von (1953): The Theory of Money and Credit. New Haven: Yale University Press

MULLIGAN, R. (2002): “A Hayekian analysis of the term structure of production.” The Quarterly Journal of
Austrian Economics 5(2): pp. 17–33

MULLIGAN, R.F. (2006): “An Empirical Examination of Austrian Business Cycle Theory.” The Quarterly Journal of Austrian Economics 9(2): pp. 69-93

WAINHOUSE, C.E. (1984): Empirical Evidence for Hayek’s Theory of Economic Fluctuations, chapter 2 in “Money in Crisis: The Federal Reserve, the Economy, and Monetary Reform” (ed. B. N. Siegel), pp. 37-71. San Francisco: Pacific Institute for Public Policy Research.

WU, J. C. & F.D. XIA (2016), “Measuring the macroeconomic impact of monetary policy at the zero lower bound.” Journal of Money, Credit and Banking 48(2-3): pp. 253-291

WU, J. C. & F.D. XIA (2017), “Time-Varying Lower Bound of Interest Rates in Europe.” Chicago Booth Research Paper 17(6): pp. 1-39

Předběžná náplň práce v anglickém jazyce

The causes of business cycles and the impact of cycles on national income and employment are one of the most important areas of study for modern macroeconomics. One of the theories dealing with their origins is the Austrian business cycle theory developed by Austrian School economists Ludwig von Mises (1953) and Friedrich A. von Hayek (1975). This theory describes an impact of credit expansion not covered by real savings on relative prices of products at different stages of production, leading to malinvestment and subsequent phases of boom and bust.

Austrian business cycle theory offers rather qualitative predictions regarding the relationship between real interest rates and capital structure. However, although this theory was not originally intended for econometric testing, in the past decades several studies have been made to verify it empirically using econometric methods. One of the first studies was Wainhouse (1984), using the impulse response function of ARMA model on monthly data from United States between 1959 to 1981. More recent studies have been applicated using the ECM model on quarterly data from United States between 1950 to 1991 (Keeler, 2001) and on monthly time series from United States between 1959 to 2003 (Mulligan, 2006) and between 1959 to 2000 (Mulligan, 2002) and Bismans and Mougeot (2009), using the fixed effects model on quarterly data on period 1980 to 2006 from Germany, USA, England and France.

With the exception of Bismans and Mougeot (2009), none of the available studies deals with the data from countries of the current euro area. This is particularly surprising given the fact that economies of these countries are much more dependent in company financing on the bank credit than the economies of Anglo-Saxon model. This is something that better fits the Austrian business cycle theory with its impact on bank credit as a cause of business cycle.

1. Hypothesis #1: Decreasing the market interest rate below the natural interest rate increases real consumable output in the short run and decreases real consumable output in the long run.
2. Hypothesis #2: Employment is procyclical with output in sectors more distant from final consumption.
3. Hypothesis #3: Employment is countercyclical with output in sectors closer to final consumption.
To examine the hypotheses, I will follow procedures from Mulligan (2006) and Mulligan (2002).

For testing the first hypothesis, I will use quarterly data on final consumption expenditure of households from Germany, France, Italy and Spain from first quarter of 1995 to present (1995Q1 is the first quarter for which data are available for all countries) provided by Eurostat. The above mentioned four countries were selected because they were part of euro area from the beginning and because they represent south and north of euro area with its differing economic models and economic performance.

Harmonised Index of Consumer Prices will be used to obtain real final consumption expenditure of households as a measure of real consumable output. As a measure of short term interest rate, I will use data on 3-month EURIBOR rates for the same period provided by Eurostat and as a proxy for long term risk free interest rate I will use data on German 10 years government bond interest rates provided also by Eurostat. These data will be used to construct the term spread. In contrast to Mulligan (2006), I will have to tackle with different monetary conditions on the European financial markets after the Great recession. In the environment of zero interest rates and quantitative easing, data on interest rates may not contain all the information. To solve this problem, I will also include quarterly data on volume of loans to households and non-financial corporations provided by ECB database and by national databases (for period before 2003).

To examine the relationship between real consumable output, volume of loans and term spread (i.e. to examine Hypothesis #1), I will use the vector error correction model. This model describes the comovement of two or more cointegrated time series by examination of long-term equilibrium relationship and short-term dynamics of adjustments to deviations from equilibrium. To find the order of integration of time series, augmented Dickey–Fuller test will be applied. Because the real final consumption expenditure is expected to be I(1) and term spread expected to be I(0), the cumulative sum of term spread will be used (Mulligan, 2006). To find if the cointegration exists between time variables, I will run Johansen test. If the expected cointegration will prove to be true, I will proceed to test the vector error correction model. The long-term effect of increase in the cumulative term spread and in the volume of loans on the real final consumable output is expected to be negative. Expected short-term effect of increase in these variables is to be positive.

To test next two hypotheses, I will use quarterly data on sectoral employment for same countries and same period provided by Eurostat. Employment data include sectors like manufacturing, construction, wholesale and retail trade, finance, real estate, government and services. As a measure of short term interest rates, I will use 3-month, 6-month and 12-month EURIBOR rates provided by Eurostat. Short term interest rates are used because they are more relevant for determining labor allocation (Mulligan, 2002). To incorporate effects of quantitative easing and environment of zero interest rates, I will also include into my model quarterly data on volume of loans to households and non-financial corporations and also quarterly data on shadow interest rates in euro area. To construct shadow interest rate, I will follow shadow rate term structure model (SRTSM) first proposed by Wu and Xia (2016) and adjusted for the environment of time-varying lower bound (Wu and Xia, 2017). To obtain shadow interest rate, I will use data on yield curves of AAA-rated euro area central government bonds provided by ECB database.

After collecting necessary data, I will continue to vector correction model. After performing same set of tests as in previous hypothesis, I will proceed to find the optimal lag length, for which I will use the likelihood ration test. After estimating the vector error correction model, the model itself will provide tool for dividing sectors into early stage and late stage of production, where the former should have negative relationship between interest rates and sectoral unemployment and for the latter the opposite should be true. A priori, typically manufacturing or construction should be early stage, while wholesale and retail trade should be late stage.
Expected Contribution:
The purpose of this thesis is to contribute to still not very extensive area of econometric examination of Austrian business cycle theory. The most important contribution of this thesis, compared to other similar studies on this topic, should be that I will examine the theory on data from euro area. The obtained results can be also used in the central bank policy analysis and as a forecasting tool.

Expected Contribution:
The purpose of this thesis is to contribute to still not very extensive area of econometric examination of Austrian business cycle theory. The most important contribution of this thesis, compared to other similar studies on this topic, should be that I will examine the theory on data from euro area. The obtained results can be also used in the central bank policy analysis and as a forecasting tool.