No. 123. ABC’S OF THE 2008 RECESSION: ROBUST AND RELIABLE INTERNATIONAL EVIDENCE ON THE AUSTRIAN THEORY OF THE BUSINESS CYCLE
I. Konstantakopoulou, E.G. Tsionas. 2012.
In this paper we test the validity of the Austrian theory of the Business Cycle (ABC). We use data for major economies over 1980-2006, well before the 2008 financial crisis. We utilize the information available in the most efficient manner, through panel unit root and panel co-integration analysis. The relationships between variables in the Austrian theory of business cycle are studied with co-integration techniques. We investigate the causality implications of the Austrian theory at various time horizons using the method of Dufour, Pelletier and Renault (2006). All our results tend to favour the Austrian theory in general terms. The implication is that in short and medium term horizons (up to 2008) credit expansion had a major role to play in the recession much like as in the 20’s.