Economic Cycle Theory, Economic Crisis, and Golden Period of Development

Zong Liang
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Zong Liang: Bank of China

Chapter Chapter 6 in The Innovation of Economic Theory in China, 2026, pp 223-269 from Springer

Abstract: Abstract The economic cycle refers to the phenomenon of alternating periods of economic expansion and contraction in an economy, recurring in a cyclical manner. Research on economic cycles is of significant importance for analyzing economic trends, predicting financial crises, and formulating government macroeconomic policies. Over time, economic cycle theory, as a crucial component of economic theory, has developed rapidly, but it also has certain limitations. Particularly after the 2008 global financial crisis, the Dynamic Stochastic General Equilibrium (DSGE) model, which has been the mainstream economic cycle theory and core analytical framework in macroeconomics since the 1980s, has faced strong criticism from various sectors of society. The primary criticism of the DSGE model lies in its deficiencies in predicting exogenous shocks and forewarning financial crises. This is because the theoretical core of the DSGE model is the theory of exogenous random shocks, which presupposes that such shocks are random and unpredictable. On one hand, within the analytical paradigm of the DSGE model, the economic cycle comprises exogenous shocks coupled with internal transmission, neglecting the significant role of the government in the economic cycle. Economic operations cannot solely rely on the “invisible hand” of the market, nor can they disregard the “visible hand” of the government. In the economic cycle, both the market and the government play indispensable roles. On the other hand, economists and policymakers have not attempted to overcome the theoretical shortcomings of the DSGE model. Instead, they have focused on clearly delineating the transmission mechanism of exogenous shocks and the policy trade-offs in responding to such shocks, neglecting the study and prediction of the sources of economic fluctuations.

Date: 2026
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DOI: 10.1007/978-981-95-2713-7_6

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