The Austrian Model of Economics, developed by economists such as Karl Menger and Friedrich von Hayek between 1890 and 1930, emphasizes the importance of a free market system over government intervention in economic planning. This model predates the Great Depression and introduces the concept of the business cycle, which consists of periods of economic expansion and recession. According to von Hayek, when central banks lower interest rates, it encourages firms to increase their investments due to the reduced cost of borrowing. This surge in investment typically leads to heightened production levels.

However, von Hayek also warned that prolonged periods of low interest rates could eventually result in deeper recessions. As investments grow, particularly in sectors like housing, they can create economic bubbles. For instance, during the early 2000s, the Federal Reserve's decision to lower interest rates spurred significant investment in the housing market rather than in productive capacities like factories. This excessive investment contributed to the housing bubble, which ultimately burst, leading to the Great Recession from 2007 to 2009. The Austrian Model thus provides a framework for understanding how fluctuations in interest rates can influence economic cycles, highlighting the potential risks associated with low interest rates and their role in precipitating recessions.