Smoothing Out The Credit Cycle Under The Conditions Of Current Credit Economy

The paper focuses on government policies as means to smoothing out the business cycles (driven by credit cycles) under the conditions of current credit economy (CCE). This concept is based on realistic elements such as endogenous money, fallacy of composition and information asymmetry. The real aspects suggest that any CCE needs a constantly positive credit growth (minimal level) in order to avoid recessions. The subjects of the empirical analysis are the real monetary, credit and other aggregates and their influence on the cycles with an emphasis on deep recessions. Subsequently, the economic policy tools which help mitigate the cycles and protect the economy from the deep crisis are implemented. The evidence suggests that the main causes of the credit cycle are money hoarding, insufficient credit growth, deleveraging of private sector and unregulated financial markets. The effective ex ante remedy for deep crisis is progressive taxation and regulation of financial markets whereas a strong fiscal stimulus and quantitative easing have to be applied in order to shorten and relieve the deep crisis ex post. The entire study is based on real US data.