Monetary Policy and The Subprime Crisis. An Austrian Approach

Bachelor Thesis , 2014 , 34 Pages , Grade: 1,0

Economics - Monetary theory and policy

The role of central banks and monetary policy in modern economies is a highly controversial topic. This paper attempts to show the relationship between monetary policy and the development of economic crisis, especially the recent Subprime Crisis in the USA. For this purpose the first part of the paper examines the Austrian theory of the business cycle and its illustration, the capital-based macroeconomics model. According to the Austrian theory artificially low interest-rates are responsible for misallocations of resources within the in-tertemporal capital structure and, consequently, reoccurring fluctuations within the eco-nomic system.
The second part of the paper applies the Austrian theory of the business cycle to the Sub-prime Crisis and investigates the role of the Federal Reserve System for the development of the crisis.
Ultimately, this paper states that expansionary monetary policy and flawed government regulations were the cause for unbalanced changes in the American structure of production and the recession.

Inhaltsverzeichnis

• Introduction
• The Austrian Theory of the Business Cycle
  • Capital-based macroeconomics
    • The market for loanable funds
    • The production possibilities frontier (PPF)
    • Stages of production
    • Capital-based macroeconomics model
  • The Business Cycle
    • Monetary expansion, the market for loanable funds and the PPF
    • Artificial interest-rates and the structure of production
    • Boom and Bust
• The Subprime Crisis and the Austrian Theory
  • Monetary policy and regulation before and during the crisis
  • Application of the theory
  • Evaluation of the Subprime crisis
• Conclusion
• Bibliography

Zielsetzung und Themenschwerpunkte

This bachelor thesis aims to analyze the relationship between monetary policy and the development of economic crises, specifically focusing on the Subprime Crisis in the USA. It utilizes the Austrian theory of the business cycle, particularly the capital-based macroeconomics model, to explain how artificially low interest rates can lead to misallocation of resources and economic fluctuations. The thesis applies this theory to the Subprime Crisis, examining the role of the Federal Reserve System in its development. It concludes that expansionary monetary policy and flawed government regulations contributed to the crisis by causing imbalances in the American structure of production.

• Austrian theory of the business cycle
• Capital-based macroeconomics model
• Role of monetary policy in economic crises
• Subprime Crisis in the USA
• Federal Reserve System

Zusammenfassung der Kapitel

The introduction provides an overview of the topic and its relevance, highlighting the controversy surrounding the role of central banks and monetary policy in modern economies. It sets the stage for the subsequent analysis of the Austrian theory of the business cycle and its application to the Subprime Crisis.

The first chapter delves into the Austrian theory of the business cycle, presenting the capital-based macroeconomics model as its illustration. It explains how artificially low interest rates, driven by monetary expansion, can distort the intertemporal capital structure, leading to misallocation of resources and economic fluctuations. The chapter explores the concept of stages of production, the impact of time preference on capital restructuring, and the dynamics of the business cycle, including the boom and bust phases.

The second chapter applies the Austrian theory of the business cycle to the Subprime Crisis, examining the role of the Federal Reserve System in its development. It analyzes the monetary policy and regulatory environment before and during the crisis, highlighting the impact of expansionary monetary policy and flawed government regulations on the housing market and the overall economy. The chapter evaluates the Subprime Crisis through the lens of the Austrian theory, emphasizing the role of misallocation of resources and unsustainable economic growth.

Schlüsselwörter

The key terms and focus themes of the text include monetary policy, the Austrian theory of the business cycle, capital-based macroeconomics, the Subprime Crisis, the Federal Reserve System, interest rates, time preference, stages of production, misallocation of resources, economic fluctuations, boom and bust cycles, and government regulations.

• College: Martin Luther University
• Grade: 1,0
• Author: Tino Förster (Author)
• Publication Year: 2014
• Pages: 34
• Catalog Number: V279914
• ISBN (eBook): 9783656737582
• ISBN (Book): 9783656737568
• Language: English
• Tags: monetary, policy, subprime, crisis, austrian, approach