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      The Inverted Yield Curve, Austrian Business Cycle Theory, and the True Money Supply

      1 , 2
      Quarterly Journal of Austrian Economics
      Mises Institute

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          Abstract

          Ever since Campbell Harvey’s (1986) doctoral dissertation, academic economists have studied the ability of an inverted yield curve to “predict” an impending recession with impressive accuracy given suitable specifications. Many economists (including Campbell) explain the correlation by neoclassical “consumption smoothing,” while others attribute the connection to monetary policy’s ability to affect the business cycle. We agree with Cwik (2004 and 2005) that the Misesian circulation credit theory of the trade cycle, relying on both monetary and “real” (capital structural) elements, is superior to both flavors of mainstream explanation. In this paper, our contribution is to show that the growth rate of the Rothbard-Salerno measure of the “true money supply” tracks movements in Treasury bond spreads remarkably well. This provides additional support for our claim that the Austrian theory of the business cycle explains the “predictive power” of the yield curve better than the mainstream approach.

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          Most cited references7

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          Predicting U.S. Recessions: Financial Variables as Leading Indicators

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            Time and Money : The Macroeconomics of Capital Structure

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              The Austrian theory of the business cycle in the light of modern macroeconomics

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                Author and article information

                Journal
                Quarterly Journal of Austrian Economics
                QJAE
                Mises Institute
                1936-4806
                1098-3708
                December 15 2021
                December 15 2021
                December 15 2021
                : 24
                : 4
                : 523-541
                Affiliations
                [1 ]Griggs Capital Strategies
                [2 ]Mises Institute
                Article
                10.35297/qjae.010113
                e77eeffe-b7a8-49dd-8d62-ba7d07189a80
                © 2021

                https://creativecommons.org/licenses/by/4.0/

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