by Alasdair MacLeod
The credit cycle drives the business, or trade, cycle. It should be obvious that changes in the quantity of money, mostly in the form of bank credit, have an effect on business conditions. Indeed, that is why central banks implement a monetary policy. By increasing the quantity of money in circulation and by encouraging the banks to lend, a central bank aims to achieve full employment.
Other than quantitative easing, the principal policy tool is management of interest rates on the assumption that they represent the “price” of money. But there is also a cyclical effect of boom and bust, linked to changes in the availability of bank credit, so modern central banks have tried to foster the boom and avoid the slump.