Introduction

INTRODUCTION
The term business cycle (or economic cycle) refers to economy-wide fluctuations in production or

economic activity over several months or years. These fluctuations occur around a long-term growth
trend, and typically involve shifts over time between periods of relatively rapid economic growth
(expansion or boom), and periods of relative stagnation or decline (contraction or recession).[1]
These fluctuations are often measured using the growth rate of real gross domestic product. Despite
being termed cycles, most of these fluctuations in economic activity do not follow a mechanical or
predictable periodic pattern.
Theory
The first systematic exposition of periodic economic crises, in opposition to the existing theory
of economic equilibrium, was the 1819 Nouveaux Principes d'économie politique by Jean Charles
Léonard de Sismondi.[2] Prior to that point classical economics had either denied the existence of
business cycles, blamed them on external factors, notably war, or only studied the long term. Sismondi
found vindication in the Panic of 1825, which was the first unarguably internal economic crisis, occurring
in peacetime. Sismondi and his contemporary Robert Owen, who expressed similar but less systematic
thoughts in 1817 Report to the Committee of the Association for the Relief of the Manufacturing
Poor, both identified the cause of economic cycles as overproduction andunderconsumption, caused in
particular to wealth inequality. They advocated government intervention and socialism, respectively, as
the solution. This work did not generate interest among classical economists, though underconsumption
theory developed as a heterodox branch in economics until being systematized in Keynesian
economics in the 1930s.
Credit/debt cycle
Main articles: Credit cycle and Debt deflation
One alternative theory is that the primary cause of economic cycles is due to the credit cycle: the net
expansion of credit (increase in private credit, equivalently debt, as a percentage of GDP) yields
economic expansions, while the net contraction causes recessions, and if it persists, depressions. In
particular, the bursting of speculative bubbles is seen as the proximate cause of depressions, and this
theory places finance and banks at the center of the business cycle.
A primary theory in this vein is the debt deflation theory of Irving Fisher, which he proposed to explain
the Great Depression. A more recent complementary theory is the Financial Instability
Hypothesis of Hyman Minsky, and the credit theory of economic cycles is often associated with Post-
Keynesian economics such as Steve Keen.
Real business cycle theory

Within mainstream economics, Keynesian views have been challenged by real business cycle models in
which fluctuations are due to technology shocks. This theory is most associated with Finn E.
Kydland and Edward C. Prescott, and more generally the Chicago school of economics (freshwater
economics). They consider that economic crisis and fluctuations cannot stem from a monetary shock,
only from an external shock, such as an innovation.
RBC theory has been categorically rejected by a number of mainstream economists in the Keynesian
tradition, such as (Summers 1986) and Paul Krugman.
Politically-based business cycle

Another set of models tries to derive the business cycle from political decisions. The partisan business
cycle suggests that cycles result from the successive elections of administrations with different policy
regimes. Regime A adopts expansionary policies, resulting in growth and inflation, but is voted out of
office when inflation becomes unacceptably high. The replacement, Regime B, adopts contractionary
policies reducing inflation and growth, and the downwards swing of the cycle. It is voted out of office when
unemployment is too high, being replaced by Party A.
The political business cycle is an alternative theory stating that when an administration of any hue is
elected, it initially adopts a contractionary policy to reduce inflation and gain a reputation for economic
competence. It then adopts an expansionary policy in the lead up to the next election, hoping to achieve
simultaneously low inflation and unemployment on election day.
CONCLUSION
Most social indicators (mental health, crimes, suicides) worsen during economic recessions. As periods of
economic stagnation are painful for the many who lose their jobs, there is often political pressure for
governments to mitigate recessions. Since the 1940s, following the Keynesian revolution, most
governments of developed nations have seen the mitigation of the business cycle as part of the
responsibility of government, under the rubric of stabilization policy.
Since in the Keynesian view, recessions are caused by inadequate aggregate demand, when a recession
occurs the government should increase the amount of aggregate demand and bring the economy back
into equilibrium

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INTRODUCTION

The term business cycle (or economic cycle) refers to economy-wide fluctuations in production or

Real business cycle theory

Politically-based business cycle

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