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Economic Theory of Bank Credit$
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L. Albert Hahn

Print publication date: 2015

Print ISBN-13: 9780198723073

Published to Oxford Scholarship Online: November 2015

DOI: 10.1093/acprof:oso/9780198723073.001.0001

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Credit and Business Cycles

Credit and Business Cycles

(p.122) (p.123) [2.]D. Credit and Business Cycles
Economic Theory of Bank Credit

L. Albert Hahn

Oxford University Press

This section summarises Hahn’s monetary theory of the business cycle. In the upswing, low interest rates make new businesses seem profitable. At the height of the boom firms are confronted with stagnating demand caused by saving, rather than consuming individuals. Defaults on loans cause banks to question the creditworthiness of their debtors and they attempt to preserve their own liquidity by restricting credit. This sets recession in full motion and all its characteristics can be seen. There are two possibilities of preventing this cycle. First, overly high interest rates would prevent boom and bust and therefore the creation of wealth. Second, by acting in concert, banks could try and prolong the boom by credit expansion and lowering interest rates. Whether or not this is a practical solution is an open question but a boom ad infinitum is a theoretical possibility.

Keywords:   business cycle, monetary theory, marginal propensity to consume, solvency, recession, boom

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