Finance and Business Cycles: The Credit-Driven Household Demand Channel

Abstract

Every major financial crisis leaves its unique footprint on economic thought.The early banking crises taught us the importance of financial sector liquidity and the lender of last resort.The Great Depression highlighted the devastating effects of bank failures and the need for counter-cyclical fiscal and monetary policy.The Great Recession has brought to the surface the importance of credit-driven business cycles that operate through household demand.We discuss empirical evidence accumulated over the last decade supporting this view, and we also describe accompanying theoretical work that helps define these concepts.

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