A Draft of My New Paper, "Whither Gold?: A Reformulation of Austrian Business Cycle Theory"

The first draft is up!

The textbook formulation of Austrian Business Cycle Theory argues that a boom that results from expansionary monetary policy inevitably sows the seeds of its own destruction. Monetary expansion creates nominal distortions and lengthens the structure of production by making long term investments appear to be more profitable than they actually are. Although the theory was formulated in a gold standard world, the relationship between gold flows and the capital structure in a system with less than fully backed base currency has never been fully explicated. This paper integrates gold flows into the framework and considers the interdependent nature of the policies of national monetary regimes. This framework reveals that policy is limited by the “Impossible Trinity” and that Austrian style analysis must take this monetary trilemma into consideration when critiquing monetary policy. Absent a central bank that maintains 100% reserve ratios, a monetary regime can only achieve a second best policy of exchange rate stabilization.