Retrieving "Business Cycles" from the archives

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1. Central Banks

   Linked via "business cycles"

   The earliest precursors to modern central banks were often state-chartered institutions originally established to manage national debt or finance military expenditures, such as the Bank of England, established in 1694 to underwrite war loans. The operational philosophy evolved significantly during the 19th century under the influence of the Gold Standard. During this period, the primary function of the nascent central banks was often seen as managing the flow of [specie](/entries/speci…

2. Private Investment

   Linked via "business cycles"

   $$Q = \frac{\text{Market Value of Assets}}{\text{Replacement Cost of Assets}}$$
   According to this theory, firms will undertake net new investment whenever $Q > 1$, as the market values their existing capital more highly than the cost of acquiring new capital. Conversely, if $Q < 1$, firms are incentivized to sell off existing assets or allow them to depreciate without replacement. A major empirical challenge to this theory is the observation that many firms maintain $Q$ values consistently near 1.0 across business cycles, suggesting that [transaction costs](/entr…

3. Private Investment

   Linked via "business cycles"

   Impact on Economic Stability
   Private investment is crucial for maintaining the economy’s long-term potential output ($Y^*$). Disruptions to private investment flows are strongly correlated with the severity of business cycles.
   Crowding Out and Crowding In