Austro-Keynesianism – Psychology-supported business cycle-policy

Abstract

In the last two decades, Austria developed a new design of business cycle policy. It starts from the radical, institutionalist Keynesian tradition, emphasizing uncertainty and the incompleteness of price signals for entrepreneurs' investment decisions as causes of deep-rooted instability. So demand management in the fiscalist's tradition is considered insufficient. Contrary to radical Keynesianism, however, Austro-Keynesianism tries to overcome this defect by market-oriented instruments: reduction of the instability by continuity in economic policy, by attempts to make the most important data for entrepreneurial decisions foreseeable, direct reduction of risk and ways to fight inflation, which do not endanger full employment. Much weight is put on a new assignation of instruments to goals, according to the problems of small open economies and to psychological factors.