The real engine of the business cycle

Friday, March 09, 2018

A valuable lesson from the Great Recession is that credit-supply expansions play a key role in subsequent recessions. When lenders make credit more available or more affordable, households respond by taking on debt, which drives up aggregate demand – that is, until the music stops. AMIR SUFI and ATIF MIAN* analyse

CHICAGO: Every major financial crisis leaves a unique footprint. Just as banking crises throughout the 19th and 20th centuries revealed the importance of financial-sector liquidity and lenders of last resort, the Great Depression underscored the necessity of counter-cyclical fiscal and monetary policies.

And, more recently, the 2008 financial crisis and subsequent Great Recession revealed the key drivers of credit-driven business cycles.

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