Implications and applications of Austrian business cycle theory in construction industry

Ing. Jan Kalista

Bachelor's thesis

Abstract:

This thesis focuses mainly on the analysis of US economy, construction industry and application of Austrian Business Cycle Theory. Theory is trying to explain the nature of recessions and expansions. It mainly focuses on credit expansion unbacked by savings as being caused by unsustainable boom with occurrence of both, malinvestment and overconsumption. Unsustainable boom is inevitably followed by a bust where market resources are reallocated accordingly. After analysis of the recent boom and bust cycle in the US economy this theory is applied to construction industry. The evidence found in this paper suggests that United States experienced a boom cause by a growth of unbacked credit and interest rates set below market clearing level. Credit expansion was even more significant due to fractional reserve banking system. When this expansion of credit ended and end of the boom came, sharp decreases in the several markets were observed, such as housing or even construction industry. High rate of bankruptcies and increase in unemployment has occurred and economy turned into recession. Construction industry results has decreased since the crisis came in 2008 and were continuing to decrease till 2011 when the whole segment started to grow again, but until now it has not returned on the previous level. However up going trend is observed as well as the whole economy grows. The relation between construction industry and business cycles is very sensitive and strong.

Abstract:

This thesis focuses mainly on the analysis of US economy, construction industry and application of Austrian Business Cycle Theory. Theory is trying to explain the nature of recessions and expansions. It mainly focuses on credit expansion unbacked by savings as being caused by unsustainable boom with occurrence of both, malinvestment and overconsumption. Unsustainable boom is inevitably followed by a bust where market resources are reallocated accordingly. After analysis of the recent boom and bust cycle in the US economy this theory is applied to construction industry. The evidence found in this paper suggests that United States experienced a boom cause by a growth of unbacked credit and interest rates set below market clearing level. Credit expansion was even more significant due to fractional reserve banking system. When this expansion of credit ended and end of the boom came, sharp decreases in the several markets were observed, such as housing or even construction industry. High rate of bankruptcies and increase in unemployment has occurred and economy turned into recession. Construction industry results has decreased since the crisis came in 2008 and were continuing to decrease till 2011 when the whole segment started to grow again, but until now it has not returned on the previous level. However up going trend is observed as well as the whole economy grows. The relation between construction industry and business cycles is very sensitive and strong.

Keywords

Austrian Business Cycle Theory, Construction Industry, Macroeconomics, Austrian School of Economics

Language used: English

Date on which the thesis was submitted / produced: 12. 10. 2015

Thesis defence

• Date of defence: 2. 11. 2015
• Supervisor: Mgr. Ing. Dominik Stroukal, Ph.D.
• Reader: Mgr. Ing. Petr Wawrosz, Ph.D.

University of Finance and Administration

Bachelor programme / field:
Economics and Management / Business Management and Corporate Finance