We talk of the Fed reducing the interest rates below their rates that would be determined by individual’s time preference or market demand to borrow savings. Austrian business cycle theory describes how this creates bubbles and malinvestment / economic distortion in the economy.
But, if your countries central bank does not inflate… but another country like say Japan has zero interest rates.. and foreign countries borrow yen for international investment, does that too create malinvestment? I imagine there is some currency risk whereby if your economy busts and your money depreciates that means you have more difficulty to repay the debt in the foreign (Yen) currency. Eastern Europe is now suffering a debt collapse where people borrowed foreign currency at low interest rates to finance their mortgages. Now that the economy has collapsed and their currencies devalued they are defaulting on their foreign debts.
Is tight monetary policy by all central banks (world wide sound money) a necessary condition to prevent the business cycle? Common sense would say that currency exchange rates would go up/down to prevent such activity from occuring long term. However, when you have a gov’t that inflates to keep its exchange rate fixed the carry trade would continue for years wouldn’t it? Permitting the cycle to occur.