Failure of the Business Cycle Theory and Call for a New Theory
Institute of Industrial Economics (liE), Chinese Academy of Social Sciences (CASS)
Abstract: The US economy has emerged from the recent financial crisis and embarked on a path of recovery. A key response of the US government to the crisis was
to restore the health of crisis-ridden financial institutions through direct fiscal relief and continuous quantitative easing and pumping sufficient liquidity into the financial markets. Fortunately, this process did not give rise to widely feared vicious inflation or post-crisis depression. Does this suggest that as long as the central bank offers unlimited loans or economic assistance to crisis-ridden entities to restore their health, a crisis can be averted? If this conclusion holds true, does this mean that the theory of cyclical economic crisis has failed? What is the new theoretical methodology to avoid economic crises? The answers to these questions will guide us in preventing and responding to financial or economic crises in the future.
Keywords: economic crisis, monetary policy, cyclical crisis, quantitative easing JEL classification: E3; 05; G1