The True Cause of Business Cycle

  • Ting Chao­ Chiung Michigan State University, East Lansing
Keywords: Business Cycle, Cause, Credit Cycle


Cause and impulse are different. Cause creates an economic mechanism in which  impulses propagate effect. If we remove cause, impulses propagate nothing. In credit economy, I derive an economic mechanism from economic agents’  budget constraint  interactively  in  which   effects arising from  impulses are co­movement. This economic mechanism does not  exist in non­credit economy while all impulses are active. Thus, loan is the true cause of business cycle. Business cycle is inherent in credit economy. If we remove loan from the world we live in, we eliminate business cycle completely and permanently.


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