Credit cycle

Updated: Aug 20, 2021

The theory that business cycles are caused by fluctuations in credit. Booms occur because banks and other lenders become over-optimistic in granting credit. At some stage their mistakes lead to defaults and a loss of confidence, resulting in a depression. During the depression lenders are over-cautious, and bad debts are gradually written off. After a while bankers recover from the shock and start lending again, which leads to a recovery, in the course of which they once again become over-optimistic, leading to the next cycle.

Reference: Oxford Press Dictonary of Economics, 5th edt.

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James Knight
Editor of Education
James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.