Editing Business cycle (section)

== Proposed explanations ==
The explanation of fluctuations in aggregate economic activity is one of the primary concerns of [[macroeconomics]] and a variety of theories have been proposed to explain them.

=== Exogenous vs. endogenous ===
Within economics, it has been debated as to whether or not the fluctuations of a business cycle are attributable to external (exogenous) versus internal (endogenous) causes. In the first case shocks are stochastic, in the second case shocks are deterministically chaotic and embedded in the economic system.<ref>{{cite journal |last1=Orlando |first1=Giuseppe |last2=Zimatore |first2=Giovanna |title=Business cycle modeling between financial crises and black swans: Ornstein–Uhlenbeck stochastic process vs Kaldor deterministic chaotic model |journal=Chaos: An Interdisciplinary Journal of Nonlinear Science |date=August 2020 |volume=30 |issue=8 |pages=083129 |doi=10.1063/5.0015916|pmid=32872798 |bibcode=2020Chaos..30h3129O |s2cid=235909725 }}</ref> The classical school (now neo-classical) argues for exogenous causes and the [[underconsumptionist]] (now Keynesian) school argues for endogenous causes. These may also broadly be classed as [[Supply-side economics|"supply-side"]] and [[Demand-side economics|"demand-side"]] explanations: supply-side explanations may be styled, following [[Say's law]], as arguing that "[[supply creates its own demand]]", while demand-side explanations argue that [[effective demand]] may fall short of supply, yielding a recession or depression.

This debate has important policy consequences: proponents of exogenous causes of crises such as neoclassicals largely argue for minimal government policy or regulation ([[laissez faire]]), as absent these external shocks, the market functions, while proponents of endogenous causes of crises such as Keynesians largely argue for larger government policy and regulation, as absent regulation, the market will move from crisis to crisis. This division is not absolute – some classicals (including Say) argued for government policy to mitigate the damage of economic cycles, despite believing in external causes, while [[Austrian School]] economists argue against government involvement as only worsening crises, despite believing in internal causes.

The view of the economic cycle as caused exogenously dates to Say's law, and much debate on endogeneity or exogeneity of causes of the economic cycle is framed in terms of refuting or supporting Say's law; this is also referred to as the "[[general glut]]" (supply in relation to demand) debate.

Until the [[Keynesian Revolution]] in mainstream economics in the wake of the [[Great Depression]], classical and neoclassical explanations (exogenous causes) were the mainstream explanation of economic cycles; following the Keynesian revolution, neoclassical macroeconomics was largely rejected. There has been some resurgence of neoclassical approaches in the form of [[real business cycle]] (RBC) theory.  The debate between Keynesians and neo-classical advocates was reawakened following the recession of 2007.

Mainstream economists working in the [[neoclassical economics|neoclassical]] tradition, as opposed to the Keynesian tradition, have usually viewed the departures of the harmonic working of the market economy as due to exogenous influences, such as the State or its regulations, labor unions, business monopolies, or shocks due to technology or natural causes.

Contrarily, in the heterodox tradition of [[Jean Charles Léonard de Sismondi]], [[Clément Juglar]], and [[Crisis theory|Marx]] the recurrent upturns and downturns of the market system are an endogenous characteristic of it.<ref>{{cite book |last=Morgan |first=Mary S. |author-link=Mary S. Morgan |title=The History of Econometric Ideas |location=New York |publisher=Cambridge University Press |year=1990 |isbn=978-0521373982 |pages=15–130 |url=https://books.google.com/books?id=iUpDzJM9lq0C&pg=PA15 }}</ref>

The 19th-century school of under consumptionism also posited endogenous causes for the business cycle, notably the [[paradox of thrift]], and today this previously heterodox school has entered the mainstream in the form of [[Keynesian economics]] via the Keynesian revolution.

=== Mainstream economics ===
{{Main|Mainstream economics}}
Mainstream economics views business cycles as essentially "the random summation of random causes". In 1927, [[Eugen Slutzky]] observed that summing random numbers, such as the last digits of the Russian state lottery, could generate patterns akin to that we see in business cycles, an observation that has since been repeated many times. This caused economists to move away from viewing business cycles as a cycle that needed to be explained and instead viewing their apparently cyclical nature as a methodological artefact. This means that what appear to be cyclical phenomena can actually be explained as just random events that are fed into a simple linear model. Thus business cycles are essentially random shocks that average out over time. Mainstream economists have built models of business cycles based on the idea that they are caused by random shocks.<ref name="Drautzburg, Thorsten 2019">Drautzburg, Thorsten. "Why Are Recessions So Hard to Predict? Random Shocks and Business Cycles." Economic Insights 4, no. 1 (2019): 1–8.</ref><ref>Slutzky, Eugen. "The summation of random causes as the source of cyclic processes." Econometrica: Journal of the Econometric Society (1937): 105–146.</ref><ref>Chatterjee, Satyajit. "From cycles to shocks: Progress in business cycle theory." Business Review 3 (2000): 27–37.</ref> Due to this inherent randomness, recessions can sometimes not occur for decades; for example, Australia did not experience any recession between 1991 and 2020.<ref>Isabella Kwai. "Australia’s First Recession in Decades Signals Tougher Times to Come."[https://www.nytimes.com/2020/09/02/business/australia-recession.html] New York Times, 09.02.20</ref>

While economists have found it difficult to forecast recessions or determine their likely severity, research indicates that longer expansions do not cause following recessions to be more severe.<ref>Tasci, Murat, and Nicholas Zevanove. "Do Longer Expansions Lead to More Severe Recessions?." Economic Commentary 2019-02 (2019).</ref>

=== Keynesian ===
According to [[Keynesian economics]], fluctuations in [[aggregate demand]] cause the economy to come to short run equilibrium at levels that are different from the full employment rate of output. These fluctuations express themselves as the observed business cycles. Keynesian models do not necessarily imply periodic business cycles. However, simple Keynesian models involving the interaction of the Keynesian multiplier and accelerator give rise to cyclical responses to initial shocks. [[Paul Samuelson]]'s "oscillator model"<ref>{{cite journal | last1 = Samuelson | first1 = P. A. | year = 1939 | title = Interactions between the multiplier analysis and the principle of acceleration | journal = Review of Economic Statistics | volume = 21 | issue = 2| pages = 75–78 | doi=10.2307/1927758| jstor = 1927758 }}</ref> is supposed to account for business cycles thanks to the multiplier and the accelerator. The amplitude of the variations in economic output depends on the level of the investment, for investment determines the level of aggregate output (multiplier), and is determined by aggregate demand (accelerator).

In the Keynesian tradition, [[Richard M. Goodwin|Richard Goodwin]]<ref>R. M. Goodwin (1967) "A Growth Cycle", in C.H. Feinstein, editor, ''Socialism, Capitalism and Economic Growth''. Cambridge: Cambridge University Press</ref> accounts for cycles in output by the distribution of income between business profits and workers' wages. The fluctuations in wages are almost the same as in the level of employment (wage cycle lags one period behind the employment cycle), for when the economy is at high employment, workers are able to demand rises in wages, whereas in periods of high unemployment, wages tend to fall. According to Goodwin, when unemployment and business profits rise, the output rises.

=== Cyclical behavior of exports and imports ===
[[Export]]s and [[import]]s are large components of an economy's [[aggregate expenditure]], especially one that is oriented toward [[international trade]]. Income is an essential determinant of the level of imported goods. A higher [[Gross domestic product|GDP]] reflects a higher level of spending on imported goods and services, and vice versa. Therefore, expenditure on imported goods and services falls during a [[recession]] and rises during an [[economic expansion]] or boom.<ref name="Acemoglu 2018">{{Cite book|last=Acemoglu|first=Daron|url=https://www.worldcat.org/oclc/956396690|title=Macroeconomics|date=2018|others=David I. Laibson, John A. List|isbn=978-0-13-449205-6|edition=Second|location=New York|oclc=956396690}}</ref>

Import expenditures are commonly considered to be procyclical and cyclical in nature, coincident with the business cycle.<ref name="Acemoglu 2018"/> Domestic export expenditures give a good indication of foreign business cycles as foreign import expenditures are coincident with the foreign business cycle.

=== Credit/debt cycle ===
{{main|Credit cycle|Debt deflation}}
One alternative theory is that the primary cause of economic cycles is due to the [[credit cycle]]: the net expansion of credit (increase in private credit, equivalently debt, as a percentage of GDP) yields economic expansions, while the net contraction causes recessions, and if it persists, depressions. In particular, the bursting of [[speculative bubble]]s is seen as the proximate cause of depressions, and this theory places finance and banks at the center of the business cycle.

A primary theory in this vein is the [[debt deflation]] theory of [[Irving Fisher]], which he proposed to explain the [[Great Depression]]. A more recent complementary theory is the [[Financial Instability Hypothesis]] of Hyman Minsky, and the credit theory of economic cycles is often associated with [[Post-Keynesian economics]] such as [[Steve Keen]].

Post-Keynesian economist [[Hyman Minsky]] has proposed an explanation of cycles founded on fluctuations in credit, interest rates and financial frailty, called the Financial Instability Hypothesis. In an expansion period, interest rates are low and companies easily borrow money from banks to invest. Banks are not reluctant to grant them loans, because expanding economic activity allows business increasing cash flows and therefore they will be able to easily pay back the loans. This process leads to firms becoming excessively indebted, so that they stop investing, and the economy goes into recession.

While credit causes have not been a primary theory of the economic cycle within the mainstream, they have gained occasional mention, such as {{Harv|Eckstein|Sinai|1990}}, cited approvingly by {{Harv|Summers|1986}}.

=== Real business-cycle theory ===
{{main|Real business-cycle theory}}
Within mainstream economics, Keynesian views have been challenged by [[real business cycle]] models in which fluctuations are due to random changes in the total productivity factor (which are caused by changes in technology as well as the legal and regulatory environment). This theory is most associated with [[Finn E. Kydland]] and [[Edward C. Prescott]], and more generally the [[Chicago school of economics]] ([[freshwater economics]]). They consider that economic crisis and fluctuations cannot stem from a monetary shock, only from an external shock, such as an innovation.<ref name="Drautzburg, Thorsten 2019"/>

=== Product based theory of economic cycles ===
[[File:Product based theory of economic cycles.png|thumb|International product life cycle]]
This theory explains the nature and causes of economic cycles from the viewpoint of life-cycle of marketable goods.<ref>{{cite journal | last1 = Vernon | first1 = R. | year = 1966 | title = International Investment and International Trade in the Product Cycle | url = http://rcin.org.pl/Content/56666| journal = Quarterly Journal of Economics | volume = 5 | issue = 2| pages = 22–26 | doi= 10.2307/1880689| jstor = 1880689 }}</ref> The theory originates from the work of [[Raymond Vernon]], who described the development of international trade in terms of product life-cycle – a period of time during which the product circulates in the market. Vernon stated that some countries specialize in the production and export of technologically new products, while others specialize in the production of already known products. The most developed countries are able to invest large amounts of money in the technological innovations and produce new products, thus obtaining a dynamic comparative advantage over developing countries.

Recent research by Georgiy Revyakin proved initial Vernon theory and showed economic cycles in developed countries overran economic cycles in developing countries.<ref>{{cite journal | last1 = Revyakin | first1 = G. | year = 2017 | title = A new approach to the nature of economic cycles and their analysis in the global context | journal = Eureka: Social and Humanities | volume = 5 | pages = 27–37 | doi = 10.21303/2504-5571.2017.00425 | doi-access = free }}</ref> He also presumed economic cycles with different periodicity can be compared to the products with various life-cycles. In case of [[Kondratiev waves]] such products correlate with fundamental discoveries implemented in production (inventions which form the [[technological paradigm]]: Richard Arkwright's machines, steam engines, industrial use of electricity, computer invention, etc.); [[Kuznets swing|Kuznets cycles]] describe such products as infrastructural components (roadways, transport, utilities, etc.); [[Juglar cycles]] may go in parallel with enterprise fixed capital (equipment, machinery, etc.), and [[Kitchin cycle]]s are characterized by change in the society preferences (tastes) for [[consumer goods]], and time, which is necessary to start the production.

Highly competitive market conditions would determine simultaneous technological updates of all economic agents (as a result, cycle formation): in case if a manufacturing technology at an enterprise does not meet the current technological environment – such company loses its competitiveness and eventually goes bankrupt.

=== Political business cycle ===
Another set of models tries to derive the business cycle from political decisions. The political business cycle theory is strongly linked to the name of [[Michał Kalecki]] who discussed "the reluctance of the 'captains of industry' to accept government intervention in the matter of employment".<ref>{{cite web|last=Kalecki|first=Michal|title=Political Aspects of Full Employment|date=January 1970|url=http://mrzine.monthlyreview.org/2010/kalecki220510.html|access-date=2 May 2012|url-status=live|archive-url=https://web.archive.org/web/20120407014237/http://mrzine.monthlyreview.org/2010/kalecki220510.html|archive-date=7 April 2012}}</ref>  Persistent [[full employment]] would mean increasing workers' bargaining power to raise wages and to avoid doing unpaid labor, potentially hurting profitability. However, he did not see this theory as applying under [[fascism]], which would use direct force to destroy labor's power.

In recent years, proponents of the "electoral business cycle" theory have argued that incumbent politicians encourage prosperity before elections in order to ensure re-election – and make the citizens pay for it with recessions afterwards.<ref>{{Cite journal | url=https://www.nber.org/papers/w1838 |doi = 10.3386/w1838|title = Elections and Macroeconomic Policy Cycles |last1 = Rogoff|first1 = Kenneth|last2 = Sibert|first2 = Anne |journal=Review of Economic Studies |volume=55 |issue=181 |pages=1–16 |date=January 1988 |doi-access=free }}</ref> The political business cycle is an alternative theory stating that when an administration of any hue is elected, it initially adopts a contractionary policy to reduce inflation and gain a reputation for economic competence. It then adopts an expansionary policy in the lead up to the next election, hoping to achieve simultaneously low inflation and unemployment on election day.<ref>• Allan Drazen, 2008. "political business cycles", ''[[The New Palgrave Dictionary of Economics]]'', 2nd Edition.  [http://www.dictionaryofeconomics.com/article?id=pde2008_P000112&edition=current&q=Political%20business%20cycle&topicid=&result_number=4 Abstract.] {{webarchive|url=https://web.archive.org/web/20101229135043/http://www.dictionaryofeconomics.com/article?id=pde2008_P000112&edition=current&q=Political%20business%20cycle&topicid=&result_number=4 |date=2010-12-29 }}<br />&nbsp;&nbsp; • [[William D. Nordhaus]], 1975. "The Political Business Cycle", ''Review of Economic Studies'', 42(2), pp. [https://www.jstor.org/discover/10.2307/2296528?uid=3739936&uid=2&uid=4&uid=3739256&sid=21101641116423 169]–190.<br />&nbsp;&nbsp; • _____, 1989:2. "Alternative Approaches to the Political Business Cycle", ''Brookings Papers on Economic Activity'', p [https://www.jstor.org/pss/2534461 pp. 1]–68.</ref>

The ''partisan business cycle'' suggests that cycles result from the successive elections of administrations with different policy regimes. Regime A adopts expansionary policies, resulting in growth and inflation, but is voted out of office when inflation becomes unacceptably high. The replacement, Regime B, adopts contractionary policies reducing inflation and growth, and the downwards swing of the cycle. It is voted out of office when unemployment is too high, being replaced by Party A.

=== Marxian economics ===
{{Main|Crisis theory}}
For Marx, the economy based on production of commodities to be sold in the market is intrinsically prone to [[Crisis (Marxian)|crisis]]. In the [[Heterodox economics|heterodox]] Marxian view, profit is the major engine of the market economy, but business (capital) profitability has a [[tendency of the rate of profit to fall|tendency to fall]] that recurrently creates crises in which mass unemployment occurs, businesses fail, remaining capital is centralized and concentrated and profitability is recovered. In the long run, these crises tend to be more severe and the system will eventually fail.<ref>Henryk Grossmann ''Das Akkumulations – und Zusammenbruchsgesetz des kapitalistischen Systems (Zugleich eine Krisentheorie)'', Hirschfeld, Leipzig, 1929</ref>

Some Marxist authors such as [[Rosa Luxemburg]] viewed the lack of purchasing power of workers as a cause of a tendency of supply to be larger than demand, creating crisis, in a model that has similarities with the Keynesian one. Indeed, a number of modern authors have tried to combine Marx's and Keynes's views. [[Henryk Grossman]]<ref>Grossman, Henryk The Law of Accumulation and Breakdown of the Capitalist System. Pluto</ref> reviewed the debates and the counteracting tendencies and [[Paul Mattick]] subsequently emphasized the basic differences between the Marxian and the Keynesian perspective. While Keynes saw capitalism as a system worth maintaining and susceptible to efficient regulation, Marx viewed capitalism as a historically doomed system that cannot be put under societal control.<ref>Paul Mattick, ''Marx and Keynes: The Limits of Mixed Economy'', Boston, Porter Sargent, 1969</ref>

The American mathematician and economist [[Richard M. Goodwin]] formalised a Marxist model of business cycles known as the [[Goodwin Model]] in which recession was caused by increased bargaining power of workers (a result of high employment in boom periods) pushing up the wage share of national income, suppressing profits and leading to a breakdown in [[capital accumulation]]. Later theorists applying variants of the Goodwin model have identified both short and long period profit-led growth and distribution cycles in the United States and elsewhere.<ref>{{cite journal | last1 = Barbosa-Filho | first1 = Nelson H. | last2 = Taylor | first2 = Lance | year = 2006 | title = Distributive and Demand Cycles in the US Economy – A Structuralist Goodwin Model | journal = Metroeconomica | volume = 57 | issue = 3| pages = 389–411 | doi=10.1111/j.1467-999x.2006.00250.x| s2cid = 153733257 }}</ref><ref>Peter Flaschel, G. Kauermann, and T. Teuber, 'Long Cycles in Employment, Inflation and Real Wage Costs', American Journal of Applied Sciences Special Issue (2008): 69–77</ref><ref>Mamadou Bobo Diallo et al., 'Reconsidering the Dynamic Interaction Between Real Wages and Macroeconomic Activity', Research in World Economy 2, no. 1 (April 2011)</ref><ref>Reiner Franke, Peter Flaschel, and Christian R. Proaño, 'Wage–price Dynamics and Income Distribution in a Semi-structural Keynes–Goodwin Model', Structural Change and Economic Dynamics 17, no. 4 (December 2006): 452–465</ref><ref>{{cite journal | last1 = Cámara Izquierdo | first1 = Sergio | year = 2013 | title = The cyclical decline of the profit rate as the cause of crises in the U.S. (1947–2011) | journal = Review of Radical Political Economics | volume = 45 | issue = 4| pages = 459–467 }}</ref> [[David Gordon (economist)|David Gordon]] provided a Marxist model of long period institutional growth cycles in an attempt to explain the [[Kondratiev wave]]. This cycle is due to the periodic breakdown of the social structure of accumulation, a set of institutions which secure and stabilize capital accumulation.

=== Austrian School ===
{{main|Austrian business cycle theory}}
Economists of the heterodox [[Austrian School]] argue that business cycles are caused by excessive issuance of credit by banks in [[fractional reserve banking]] systems. According to Austrian economists, excessive issuance of bank credit may be exacerbated if [[central bank]] monetary policy sets interest rates too low, and the resulting expansion of the money supply causes a "boom" in which resources are misallocated or [[malinvestment|"malinvested"]] because of artificially low interest rates. Eventually, the boom cannot be sustained and is followed by a "bust" in which the malinvestments are liquidated (sold for less than their original cost) and the money supply contracts.<ref>{{cite web|last1=Block|first1=Walter|last2=Garschina|first2=Kenneth|title=Hayek, Business Cycles and Fractional Reserve Banking: Continuing the De-Homogenization Process|url=https://mises.org/journals/rae/pdf/rae9_1_3.pdf|website=mises.org|date=20 July 2005 |publisher=Ludwig von Mises Institute|access-date=28 July 2014|url-status=live|archive-url=https://web.archive.org/web/20130910205248/http://mises.org/journals/rae/pdf/RAE9_1_3.pdf|archive-date=10 September 2013}}</ref><ref>{{cite web|last1=Shostak|first1=Dr. Frank|title=Fractional Reserve banking and boom-bust cycles|url=https://mises.org/journals/scholar/shostak2.pdf|website=mises.org|publisher=Ludwig von Mises Institute|access-date=28 July 2014|url-status=live|archive-url=https://web.archive.org/web/20120714030329/http://mises.org/journals/scholar/shostak2.pdf|archive-date=14 July 2012}}</ref>

One of the criticisms of the [[Austrian business cycle theory#Criticisms|Austrian business cycle theory]] is based on the observation that the [[United States]] suffered recurrent economic crises in the 19th century, notably the [[Panic of 1873]], which occurred prior to the establishment of a U.S. central bank in 1913. Adherents of the Austrian School, such as the historian [[Thomas Woods]], argue that these earlier financial crises were prompted by government and bankers' efforts to expand credit despite restraints imposed by the prevailing gold standard, and are thus consistent with [[Austrian Business Cycle Theory]].<ref>{{cite web|last1=Woods|first1=Thomas Jr.|title=Can We Live Without the Fed?|url=http://archive.lewrockwell.com/woods/woods219.html|website=lewrockwell.com|publisher=Lew Rockwell|access-date=27 July 2014|url-status=live|archive-url=https://web.archive.org/web/20140313212821/http://archive.lewrockwell.com/woods/woods219.html|archive-date=13 March 2014}}</ref><ref>{{cite web|last1=Woods|first1=Thomas Jr.|title=Economic Cycles Before the Fed|url=https://www.youtube.com/watch?v=TxcjT8T3EGU|website=youtube.com|date=26 August 2011 |publisher=Mises Media|access-date=27 July 2014|url-status=live|archive-url=https://web.archive.org/web/20140912194610/http://www.youtube.com/watch?v=TxcjT8T3EGU|archive-date=12 September 2014}}</ref>

The Austrian explanation of the business cycle differs significantly from the [[mainstream economics|mainstream]] understanding of business cycles and is generally rejected by mainstream economists. Mainstream economists generally do not support Austrian school explanations for business cycles, on both theoretical as well as real-world empirical grounds.<ref>Friedman, Milton. "The Monetary Studies of the National Bureau, 44th Annual Report". The Optimal Quantity of Money and Other Essays. Chicago: Aldine. pp. 261–284.</ref><ref>Friedman, Milton. "The 'Plucking Model' of Business Fluctuations Revisited". Economic Inquiry: 171–177.</ref><ref name="springerlink.com">{{cite journal | last1 = Keeler | first1 = JP.  | s2cid = 18902379 | year = 2001 | title = Empirical Evidence on the Austrian Business Cycle Theory | journal = Review of Austrian Economics | volume = 14 | issue =4 | pages = 331–51|doi=10.1023/A:1011937230775 }}</ref><ref>Interview in Barron's Magazine, Aug. 24, 1998 archived at Hoover Institution {{cite web |url=http://www.hoover.org/publications/hoover-digest/article/6459 |title=Mr. Market &#124; Hoover Institution |access-date=2015-09-28 |url-status=dead |archive-url=https://web.archive.org/web/20131231213357/http://www.hoover.org/publications/hoover-digest/article/6459 |archive-date=2013-12-31 }}</ref><ref name="Kaldor1942">{{cite journal | author=Nicholas Kaldor| title=Professor Hayek and the Concertina-Effect| journal=Economica| volume=9 | issue=36 | year=1942 | pages=359–382 | jstor=2550326 | doi=10.2307/2550326 }}</ref><ref name="Garrison">R. W. Garrison, [http://www.auburn.edu/~garriro/amagi.htm "F. A. Hayek as 'Mr. Fluctooations:' In Defense of Hayek's 'Technical Economics'"] {{webarchive|url=https://web.archive.org/web/20110808141645/http://www.auburn.edu/~garriro/amagi.htm |date=2011-08-08 }}, ''Hayek Society Journal'' (LSE), '''5'''(2), 1 (2003).</ref> Austrians claim that the boom-and-bust business cycle is caused by government intervention into the economy, and that the cycle would be comparatively rare and mild without central government interference.

=== Yield curve ===
{{Main|inverted yield curve}}
[[File:FFR treasuries.webp|thumb|375px|right|
{{legend-line|#F5A623 solid 3px|[[Mortgage loan|30 year mortgage average]]}}
{{legend-line|#F8E71C solid 3px|[[treasury bond|30 Year Treasury Bond]]}}
{{legend-line|#000000 solid 3px| 10 Year Treasury Bond}}
{{legend-line|#9013FE solid 3px| 2 Year Treasury Bond}}
{{legend-line|#4A90E2 solid 3px| 3 month Treasury Bond}}
{{legend-line|#D0021B solid 4px| Effective Federal Funds Rate}}  
{{legend-line|#E786F9 solid 4px| [[United States Consumer Price Index|CPI inflation]] year/year}}
{{color box|lightgrey}} [[List of recessions in the United States|Recessions]]
]]
[[File:10-year minus 3-month US Treasury Yields.png|thumb|10-year minus 3-month US Treasury Yields]]

The slope of the [[yield curve]] is one of the most powerful predictors of future economic growth, inflation, and recessions.<ref>{{cite journal | doi=10.1162/003465398557320|title = Predicting U.S. Recessions: Financial Variables as Leading Indicators| journal=Review of Economics and Statistics| volume=80| pages=45–61|year = 1998|last1 = Estrella|first1 = Arturo| last2=Mishkin| first2=Frederic S.|s2cid = 11641969|url = http://www.nber.org/papers/w5379.pdf}}</ref> One measure of the yield curve slope (i.e. the difference between 10-year Treasury bond rate and the 3-month Treasury bond rate) is included in the [http://research.stlouisfed.org/fred2/series/STLFSI Financial Stress Index] published by the [[Federal Reserve Bank of St. Louis|St. Louis Fed]].<ref>{{cite web|title=List of Data Series Used to Construct the St. Louis Fed Financial Stress Index|date=31 December 1993 |url=https://www.stlouisfed.org/news-releases/st-louis-fed-financial-stress-index/stlfsi-key|publisher=The Federal Reserve Bank of St. Louis|access-date=2 March 2015|url-status=live|archive-url=https://web.archive.org/web/20150402151924/https://www.stlouisfed.org/news-releases/st-louis-fed-financial-stress-index/stlfsi-key|archive-date=2 April 2015}}</ref>  A different measure of the slope (i.e. the difference between 10-year Treasury bond rates and the [[federal funds rate]]) is incorporated into the [[Conference Board Leading Economic Index|Index of Leading Economic Indicators]] published by [[The Conference Board]].<ref>{{cite web|title=Description of Components|url=http://www.conference-board.org/data/bci/index.cfm?id=2160|website=Business Cycle Indicators|publisher=The Conference Board|access-date=2 March 2015|url-status=live|archive-url=https://web.archive.org/web/20150402203219/http://www.conference-board.org/data/bci/index.cfm?id=2160|archive-date=2 April 2015}}</ref>

An inverted yield curve is often a harbinger of [[recession]].  A positively sloped yield curve is often a harbinger of [[inflation]]ary growth. Work by Arturo Estrella and [[Tobias Adrian]] has established the predictive power of an inverted yield curve to signal a recession.  Their models show that when the difference between short-term interest rates (they use 3-month T-bills) and long-term interest rates (10-year Treasury bonds) at the end of a federal reserve tightening cycle is negative or less than 93 basis points positive that a rise in unemployment usually occurs.<ref>Arturo Estrella and Tobias Adrian, ''[http://www.newyorkfed.org/research/staff_reports/sr397.pdf FRB of New York Staff Report No. 397] {{webarchive|url=https://web.archive.org/web/20150906031016/http://www.newyorkfed.org/research/staff_reports/sr397.pdf |date=2015-09-06 }}'', 2009</ref>  The [[Federal Reserve Bank of New York|New York Fed]] publishes a [http://www.newyorkfed.org/research/capital_markets/ycfaq.html monthly recession probability prediction] derived from the yield curve and based on Estrella's work.

All the recessions in the [[United States]] since 1970 (up through 2017) have been preceded by an inverted yield curve (10-year vs. 3-month). Over the same time frame, every occurrence of an inverted yield curve has been followed by recession as declared by the [[National Bureau of Economic Research|NBER]] business cycle dating committee.<ref>{{cite web|title=Announcement Dates|url=https://www.nber.org/cycles/|website=US Business Cycle Expansions and Contractions|publisher=NBER Business Cycle Dating Committee|access-date=1 March 2015|url-status=live|archive-url=https://web.archive.org/web/20071012231548/https://www.nber.org/cycles/|archive-date=12 October 2007}}</ref>

{|class="wikitable sortable"
|-
!Event !! class="unsortable"|Date of inversion start !! class="unsortable"|Date of the recession start !! Time from inversion to recession Start !! Duration of inversion !! Time from recession start to NBER announcement !! Time from disinversion to recession end !! Duration of recession !! Time from recession end to NBER announcement !! Max inversion
|-
! !! !! !! Months !! Months !! Months !! Months !! Months !! Months !! Basis points
|-
|[[Recession of 1969–70|1970 recession]] || December 1968 || January 1970 || 13 || 15 || NA || 8 || 11 || NA || −52
|-
|[[1973–75 recession|1974 recession]] || June 1973 || December 1973 || 6 || 18 || NA || 3 || 16 || NA || −159
|-
|[[Early 1980s recession|1980 recession]] || November 1978 || February 1980 || 15 || 18 || 4 || 2 || 6 || 12 || −328
|-
|[[Early 1980s recession|1981–1982 recession]] || October 1980 || August 1981 || 10 || 12 || 5 || 13 || 16 || 8 || −351
|-
|[[Early 1990s recession|1990 recession]] || June 1989 || August 1990 || 14 || 7 || 8 || 14 || 8 || 21 || −16
|-
|[[Early 2000s recession|2001 recession]] || July 2000 || April 2001 || 9 || 7 || 7 || 9 || 8 || 20 || −70
|-
|[[Great Recession|2008–2009 recession]] || August 2006 || January 2008 || 17 || 10 || 11 || 24 || 18 || 15 || −51
|-
|[[COVID-19 recession|2020–2020 recession]] || March 2020 || April 2020 ||   ||   ||   ||   ||   ||   ||
|-
|Average since 1969 ||  ||  || 12 || 12 || 7 || 10 || 12 || 15 || −147
|-
|Standard deviation since 1969 ||  ||  || 3.83 || 4.72 || 2.74 || 7.50 || 4.78 || 5.45 || 138.96
|}
Estrella and others have postulated that the yield curve affects the business cycle via the balance sheet of banks (or [[Shadow banking system|bank-like financial institutions]]).<ref>Arturo Estrella, ''[https://ssrn.com/abstract=1532309 FRB of New York Staff Report No. 421] {{webarchive|url=https://web.archive.org/web/20130921061128/https://ssrn.com/abstract=1532309 |date=2013-09-21 }}'', 2010</ref>  When the yield curve is inverted banks are often caught paying more on short-term deposits (or [[Repurchase agreement|other forms]] of short-term wholesale funding) than they are making on long-term loans leading to a loss of profitability and reluctance to lend resulting in a [[credit crunch]].  When the yield curve is upward sloping, banks can profitably take-in short term deposits and make long-term loans so they are eager to supply credit to borrowers. This eventually leads to a [[Economic bubble|credit bubble]].

=== Georgism ===
{{Main|Georgism}}
[[Henry George]] claimed land price fluctuations were the primary cause of most business cycles.<ref>George, Henry. (1881). ''Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth; The Remedy''. Kegan Paul (reissued by [[Cambridge University Press]], 2009; {{ISBN|978-1108003612}})</ref>

===Other factors===
Population swings can impact business cycles.<ref name="d083">{{cite journal | last1=Easterlin | first1=Richard A. | last2=Wachter | first2=Michael L. | last3=Wachter | first3=Susan M. | title=The Changing Impact of Population Swings on the American Economy | journal=Proceedings of the American Philosophical Society | publisher=American Philosophical Society | volume=122 | issue=3 | year=1978 | issn=0003-049X | jstor=986545 | pages=119–130 | url=http://www.jstor.org/stable/986545 | access-date=5 August 2024}}</ref>