ABSTRACT
Modern economics places a great deal of emphasis on the role of consumer confidence and expectations about the future, both of which are clearly important factors in recessions. Using the saving-investment approach, Knut Wicksell explained that recessions and depressions occurred when interest rates failed to properly coordinate savings and investment. A key aspect to the argument was Wicksell's distinction between the natural rate of interest and the market loan rate. In terms of the business cycle, a recession occurs when real gross domestic product (GDP) falls from a peak to a trough. The recovery or expansion phase occurs when the economy climbs from its trough back up to a peak. Charles Kindleberger, whose work perhaps came closest to outlining the scenario that played out in the years leading up to the 2007-2008 crisis, was an economic historian who wrote about many episodes of economic boom, followed by crash, throughout history.
