Political-Economic Options for Smoothing of Business Cycles within the Current Credit-Economy

The article formulates the general political-economic possibilities for smoothing of business cycles under the realistic assumptions of the current credit-economy. Firstly it endeavours to explain the mechanism of the financial and real economy functioning with an emphasis on banking sector. The initial theoretical model is considered as unrealistic but proper for demonstration of the consequences of money endogeneity, mechanism of banking financing and dependency of economic growth on credit growth and savings. On the basis of this explanation the article identifies the real causes of credit cycles in the current credit-economy and performs some relevant empirical evidence. The causes include insufficient credit growth, significant concentration of monetary assets, disproportionate development between inflation and excess money growth, deregulation, transmission of credit risk, deleveraging of private sector and imperfect steering of interest rates. Subsequently, author constitutes the basic political-economic tools which could possibly eliminate (or at least mitigate) both the deep and shallow recessions in ex-ante and ex-post periods. The study concludes that possible political-economic tools are following: traditional and non-traditional monetary policy, fiscal expansion, redistribution through progressive taxation, microeconomic and macroeconomic regulation. The entire study is based on US data.

Keywords: money supply and credit, money hoarding, economic policy, credit cycles, business cycles, bank and other depository institutions