Austrian Business Cycle Theory

Austrian Business Cycle Theory (ABCT) suggests that economic booms occur when central banks create excessive credit, leading to artificially low interest rates. This encourages businesses to invest in projects that may not be viable in the long term. Eventually, when the credit bubble bursts, these investments are revealed to be unsustainable, causing a recession. Essentially, ABCT argues that misallocations of resources, driven by distorted financial signals, lead to cycles of boom and bust in the economy, highlighting the risks of interventionist monetary policies.