A New Paradigm for Economic Policy
New Directions in Modern Economics series
Edited by Claude Gnos and Sergio Rossi
Chapter 7: Is there a common cause to economic and financial crises?
The recent crisis related to speculative investments in the US market for subprime mortgage loans is just the last in a long series of crises to have hit the international financial markets. Strong fluctuations in the price of oil and basic farm-products have caused serious concern about the future of the global economy, which has allegedly entered a much more difficult and uncertain period. Worldwide economic turmoil and fundamental uncertainty are threatening the development of major economies, and experts increasingly evoke the ghost of recession. How can we explain this situation? What are the reasons for economic crises, and what can be done to address them? The aim of this chapter is to propose a new, macroeconomic analysis of crises capable of giving a satisfactory answer to these questions. In their attempt to understand the nature and causes of (commercial and financial) crises, economists have been wondering whether or not the recurrence and persistence of crises are a sign that economic events are interrelated, and are periodically subject to fluctuations that form the ups and downs of a cyclical movement. While in the first half of the nineteenth century most authors were convinced that crises were isolated and disconnected events, towards the end of that century they began to think of crises as parts of a chain of events implying their recurrence. It was the beginning of the theories of cycles. Within this theoretical framework, economists faced the problem of reconciling the notions of instability and fluctuation proper to the idea of cyclical movements, with the notion of equilibrium, which was considered as the state towards which the economic system naturally tends.
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