The Effect of Global Interest Rates on Business Cycles in Developing Countries within The Austrian Business Cycle Theory Framework: A Panel VAR Application

In this study, it was analyzed the effects of global interest rates on nine developing countries within the Austrian business cycle theory. According to the Austrian Business Cycles Theory, the artificial decline in interest rates disrupts the resource allocation of the economy, causing an unsustainable economic recovery, and the process results in a crisis. After examining the Austrian business cycle theory for closed and open economies, the panel VAR model was tested for the 1996-2016 period. First, it was investigated the relationship between the US-Euro Area interest rates and interest rates of developing countries. It was found that both interest rates have impacts on interest rates of developing countries. Then, it was analyzed that the effects of these three interest rates on industrial production of developing countries. Besides the domestic interest rates, especially the US interest rate has significant effects on changing in industrial production