ABSTRACT
This chapter concerns the problem of business cycles. It shows that a macroeconomic implication of approach can be interpreted as a financial foundation of the Austrian Business-Cycle Theory (ABCT). The economic intuition behind the ABCT is quite straightforward. An “Austrian” business cycle is a credit-induced boom-bust sequence that results from investors, entrepreneurs or both reacting to a cost of capital (the interest rate) that is too low to be sustained, such as when the central bank reduces short-term interest rates below their market rate. The ABCT, like any theory, allows for different levels of generality depending on which conditional assumptions are used. The ABCT should be seen as a theory that explains why a credit-induced boom may be unsustainable, but not as a theory that can explain the particularities of the bust. With fiat currencies, the ABCT has two channels of transmission affecting resource misallocation.
