The role of "artificially" low interest rates through credit expansion - The road to prosperity or another recession?

Abstract: Current macroeconomic doctrine holds that the aim of monetary policy should be a steady inflation rate aligned with expectations. Consequently, central banks have declared remarkably low interest rates after the financial crisis in 2008 and pursue vast monetary expansion in their battle against slumbering economic activity. This thesis questions to what extent macroeconomists can claim to know the consequences following after the immediate stimulative effect on investment of such a policy measure. The subject-matter of investigation is the so-called circulation credit theory, which holds that credit expansion to producers will induce systematic misallocation of resources, creating an inherently unsustainable boom that will necessarily end in crisis. This theory, developed by Ludwig von Mises and Friedrich von Hayek, was discarded by mainstream economics as the Keynesian revolution changed the landscape of economic theory, after having been much debated in prestigious journals during the 1930's. It is here investigated whether the most influential economists criticizing the theory during the debate, John Maynard Keynes, Piero Sraffa and Frank Knight, who all considered themselves able to invalidate the theory, ever succeeded in doing so. A careful inquiry into their main arguments suggests that none of these succeeded in their alleged refutation and that the proposition of the harmful effects of credit expansion put forth by Hayek and Mises might have been too hastily discarded.