The True Cause of Business Cycle
Abstract
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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