I’ve entitled this study A Dynamic Austrian Macro Model which gives me some ‘splainin’ to do.

By Austrian, I mean to indicate the Austrian School of economics. While I am not greatly knowledgeable of the finer theoretical points of this school (see link), what I intend to refer to is a school of thought in the classical tradition with a laissez faire orientation to markets and a strong hostility to central banking. This is the entire substance of what Austrian School means to me for the purpose of this study.

Next to be explained is the association of the words Dynamic Macro Model with the Austrian school, who are famous for their rejection of both mathematics and macroeconomics models. The so called Austrian Business Cycle is little more than a statement that once credit over expands to produce inflation that it requires little more than common sense to know that a calamity will follow.  To that I would reply that it would be useful to know the ‘when’ and ‘how’ of things and not just the ‘what’.

My chief reason for preferring the classical tradition is the adherence to Say’s Law of Markets which can be reduced to the simple Quantity Theory of Money equation PQ = MV. This equation says that the price level in the Macro economy is directly related to the money supply. This is a basic assumption of the model I here present. Keynesians and others reject this assumption.

The P  in the equation PQ = MV  (also known as Fisher’s Equation of Exchange) is called the price level.  There seems to be a dispute between the Keynesians and Austrians about what inflation is.  The Keynesians say that inflation is a rise in prices driven by the Phillips Curve or some such,  while the Austrians say that it is a pathological condition caused by too much money. To the Austrians, a rise in the price level is evidence of malinvestment and decumulation of capital.