The Distortions Created by Central Banks Go Beyond Those Considered by the Traditional ABC Theory; Financial Bubbles and Crashes Can Be Linked to the Action of Central Banks

The Austrian School of Economics has historically put its focus on the relationship between monetary expansions, not backed by a voluntary increase of savings, and the productive structure. Thus, the ABCT [Austrian Business Cycle Theory] has analyzed how monetary expansions distort the allocation of resources between consumer and capital goods, generating periods of boom and busts (Mises [1912] 1981, Hayek 2008 and Huerta de Soto 2009). However, little attention has been paid to the distortions created by monetary expansions on the financial structure of the economy.

In this paper, I will try to describe the different links between monetary expansions and the financial structure of an economy, argue that the financial effects of monetary expansions play a significant role in the development of business cycles, and explain why the distortions created by central banks go beyond those taken into account by the traditional ABCT. Specifically, I will discuss how financial bubbles and crashes can be linked to the action of central banks, through the impact of monetary expansions in the agents’ balance sheets, which generate an excessively fragile financial structure that is, at the same time, reliant on an unsustainable productive structure.

--Rafael García Iborra, "Financial Effects of Monetary Expansions," Procesos de Mercado: Revista Europea de Economía Política 15, no. 1 (Spring 2018): 76.