Empirical revelation of the Austrian business cycle theory in Japan

Abstract: The Austrian business cycle theory suggest that monetary policies can change relative prices in the economy, leadings to unsustainable changes in the structure of production and ultimately decreasing efficiency as the structure of production corrects. This paper uses VAR and VEC estimations with Impulse Response Functions to extract the impact of Japanese monetary policies on domestic structure of production, as defined in the Austrian capital theory, between the years 1983 and 2017. The measures of stages of production is calculated in similar manner as previous research by Lester & Wolff (2013). This means that early and late stage indexes of producer prices and production is normalized by intermediate stage indexes of producer prices and production. The findings are mixed between the different approaches utilized to capture the stance of monetary policies. However, the results suggest that the short-term target Policy rate of the Bank of Japan have had a negative correlation with early- and late stage production relative to intermediate production, which is reasonably in line with the conventional version of the Austrian business cycle theory.