The Foundation of the Austrian Boom-Bust Cycle Theory Is the Cantillon Effects

The foundation of the Austrian boom-bust cycle theory is a general principle of monetary theory known as Cantillon effects.... With Cantillon effects, the allocation of resources and the valuation of assets (bubbles) are shaped by nonneutral monetary changes. Two empirical generalizations contributed to the Austrian emphasis on the importance of the capital-structure approach in analyzing the macroeconomy. In a fractional reserve banking system, especially one supported by a central bank, money creation can be accompanied by credit creation. Credit may be made available in excess of available savings as banks extend loans to entrepreneurs. The money and credit creation process reduces interest rates relative to equilibrium rates. The new pattern of money expenditure directs resources into more labor-saving and “roundabout” methods of production. In addition, a market rate below the natural rate may provide an incentive for reduced saving (higher consumption). The lower interest rate used as a discount factor combined with an inflation-induced illusion of higher expected profits creates a “wealth” or “net worth” effect which artificially increases consumption expenditures during the money-induced boom.

--John P. Cochran, "Capital-Based Macroeconomics: Austrians, Keynes, and Keynesians," in The Oxford Handbook of Austrian Economics, ed. Peter J. Boettke and Christopher J. Coyne (New York: Oxford University Press, 2015), 173.