Volume 6, No. 1 (Spring 2003)
In a recent study, Keeler (2001) attempts to provide historical/empirical evidence for the Austrian business cycle theory by examining the effect of interest-rate changes on various components of investment spending (classified arbitrarily as early- or late-stage investment) and consumer spending. Our analysis implies that such research is likely to be misleading. The important causal feature is not the change in observed interest rates, or even changes in interest rates relative to the natural rate, but the amount of circulation credit and whether the credit issued is initiatory, as in the benchmark case, or reactive, as in the productivity shock case and the saving decline case.
