Risk elasticity of economic agents: credit-financing and business cycles
How credit-financing affects the overall real economy is unknown. The paper makes a humble attempt to fill the gap and tries to explain pathways of effect of credit-financing to the economy and how it causes business cycles through financial and economic decision-making of economic agents. In explanation of how credit-financing may lead to economic downturns in business cycles, the paper scrutinizes the ability of people to take personal financial and economic risks. Existing theories don’t elaborate on how individuals make financial and economic decisions. It sheds a blind zone effect of individuals’ financial and economic decision-making to financial and economic processes, which can be the key driving force of financial market behavior and economic motions. By introducing the understanding of elasticity of individuals to anticipated personal financial and economic risks, the paper brings in the term the risk elasticity factor which is derived from people’s attitude to resources: income and wealth. It sets the same impact factor to an individual as the investor and the customer. And the common line of financial and economic behavior of people was drawn based on review and analysis of the literature and empirical evidence. Then, the cause-and-effect analysis is applied in conjunction with firms’ behavior, fiscal and monetary policies as they have impact factor one to another define financial and economic motions. This may provide a new purview to financial and economic phenomena.