Monetary Policy in a Hayekian Supply Side Model
by Antony Mueller (University of Caxias do Sul, Brazil)
In this paper standard macroeconomic models are combined with the Hayek-Garrison model of the business cycle in order to demonstrate in which way modern central banks are prone to initiate boom-bust-cycles through monetary policy. It is shown under which conditions such a policy will occur and why central bank authorities tend to be misled by an apparently stable price-level. Without central bank interference, productivity increases due to technological advances, other cost reductions or an increased supply of cheaper labor would bring about temporary deflation. Left to its natural path, rising profits and a higher purchasing power would move the economy towards an expansion and increased expenditures. However, with central bank interventions that are directed at maintaining the so-called price level, the monetary authorities will expand the money supply and transform a productivity-led wealth increase into a debt-driven boom, which produces the foundation for the bust later on.
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