Isolating Malinvestment: How the Austrian School Can Engage in the Debate on Credit Cycle Transmission

The contemporary macroeconomic literature has documented a now-classic empirical regularity: Intense credit expansions are followed by more severe recessions (Jordà et al. 2013). The debate on the mechanisms that explain this correlation remains open, and the dominant hypotheses (credit channel, financial accelerator, Minsky’s financial instability hypothesis) share an aggregate focus that does not address the allocative dimension. This article argues that Austrian business cycle theory (ABCT) contains a proposition—intersectoral malinvestment—that offers that dimension and is well positioned to participate in the debate but has been largely absent from it. We argue that this disconnect stems from two causes: the logical-deductive character of Austrian methodology, which has traditionally shied away from empirical work, and a methodological difficulty in the few existing empirical attempts, derived from the ambition to validate the theory as a whole. The proposed path consists in isolating the mechanism, testing malinvestment separately from the rest of the Austrian cycle by exploiting a feature of the theoretical framework itself. We present two illustrative methodological decisions—an initial temporal window (start-up window) and the use of relative wages between productive stages—and apply them to the Spanish credit cycle of the first decade of the 2000s. The purpose of the article is to articulate a research program that enables the Austrian tradition to participate in one of the most relevant debates in modern macroeconomics.