Austrian business cycle theory: An empirical analysis for Turkey

Austrian Business Cycle Theory claims that credit creation by monetary authorities would push investment to point where society's long term save rate cannot afford, creating a mismatch between supply and demand that would inevitably cause recession. In addition, the theory argue that expansionary monetary policies in recession could generally only postpone the necessary structural adjustment, it could lead to more serious problems in the economy. The purpose of this thesis is to examine the Austrian Business Cycle Theory and the state of empirical evidence for it. In study reviews the essentials of that approach and the recent application of the Austrian Business Cycle Theory in the economics literature. In the empirical part of the thesis, the relationship between consumption, investment and monetary policy was studied using Vector Error Correction Model (VECM). Money supply (M1) was used as a proxy for the monetary policy. The model was estimated using Turkey data from 1968 to 2017. Results are consistent with the hypothesis of the Austrian Business Cycle Theory that monetary policy shocks explain cycles.