The expectational assumptions behind the traditional Austrian theory

The postulated entrepreneurial mistakes in the traditional Austrian theory, which are systematic, violate the rational expectations hypothesis. Entrepreneurs with rational expectations will sometimes choose unprofitable term-lengths of investment, but they will not err systematically towards excessive term-length. The expectational assumptions behind the Austrian claim, while they never have been fully specified, appear to consist of two separate concepts 1 Na ve expectations entrepreneurs...

Monetary sources of real economic volatility

Although this chapter focuses on real cycles, increases in the volatility of the real economic environment may come from monetary shocks as well. We can imagine the appointment of a new, irresponsible head of the central bank, a detrimental change in fiscal policy, or unfavorable electoral results, to name a few examples of volatility-increasing shocks. By assumption, the increase in money supply volatility does not operate in counter-cyclical fashion, and is not used to offset real shocks to...

Appendix A Forced Savings

Analyses of intertemporal discoordination often have stressed a concept known as 'forced savings.' Both Hayek and Dennis Robertson analyzed this phenomenon, or more properly phenomena, since different definitions of the concept have been used.21 According to one common definition (e.g., Bresciani-Turroni 1936, p. 171), forced saving occurs when the inflation enters the banking system and bids resources away from consumption and towards capital goods production. This concept arises from the...

How Does Inflation Affect Stock Returns

The consensus of the finance literature finds that both expected and unexpected price inflation tend to decrease stock returns Bodie 1976 Nelson 1976b Fama and Schwert 1977 Modigliani and Cohn 1979 Feldstein 1980 Fama 1981 . These articles define inflation in terms of the percentage increase in some price index, typically the consumer price index. Expected and unexpected inflation are differentiated by procedures derived from Barro 1978 . The results of this literature contradict the postulate...