Editing Recession (section)

==Causes of recessions==
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There are many reasons why recessions happen. One overall reason can be lack of demand due to sharp developments in the prices of the inputs used in producing goods and services. Another main reason can be problems e.g. in financial markets. Because recessions have many likely explanations, it is demanding to predict them. Some variables might at first glance be the causes of recessions, but they could also be the results of a recession, which means they are endogenous to recessions.<ref name="auto"/> One can summarize the causes of recessions in the following categories:

Economic factors:
* [[Supply shock]]s: A sudden increase in the prices of key inputs (input price shock) can lead to higher production costs and reduced aggregate demand, triggering a recession.<ref name="auto"/>
* [[Fiscal policy|Fiscal policies]] or monetary policies by the government, which are contractionary in nature: A contractionary policy is a tool usually used to tame rising inflation. Excessive use of tightening policies, e.g. too rapid increases in interest rates, can reduce demand and consumer spending for goods and services, leading to a recession (creating a so called [[Hard landing (economics)|hard landing]]).<ref name="auto"/> Monetary policy changes can influence both the frequency and intensity of recessions.
* [[Demand shock]]s: A widespread drop in spending, known as an adverse demand shock, can lead to recessions. This can be triggered by various events, including the bursting of economic bubbles (see economic bubbles below).

Financial factors:
* [[Credit risk]] and credit and debt issues: Overextension of credit and accumulation of risky debt can lead to financial crises. When borrowers (e.g. corporations) default, it can cause a cascade of business failures and reduced consumption).<ref name="auto"/>
* [[Financial risk]] factors that can cause a recession are plentiful: Besides credit risk like e.g. [[concentration risk]], there is also [[market risk]] like e.g. [[systemic risk]], [[liquidity risk]] like e.g. [[refinancing risk]], [[investment risk]] like e.g. [[model risk]], [[Business risks|business risk]] like e.g. [[political risk]] as well as [[profit risk]].
* Financial market problems: Issues in financial markets, such as rapid credit expansion. When households accumulate excessive debt and later face difficulties in meeting their obligations, they cut back on consumption, leading to a decrease in economic activity.
* [[Credit crunch|Credit tightening]]: Restrictions on credit availability also known as credit crunch, can reduce consumer spending and business investment, leading to a slowdown in economic activity.
* [[Interest rate|Interest rate distortions]]: Artificially low interest rates can encourage excessive borrowing and result in a buildup of risk in the financial sector. When interest rates rise, these investments (like new constructions in real estate) may fail, exacerbate economic declines, contributing to a recession.
* [[Economic bubble]]: Unsustainable rapid increases in asset prices due to excessive risk-taking, characterized by exaggerated optimism during the [[economic boom]] period and accumulation of financial risks during good economic times creates a asset bubble, followed by continued sharp declines in asset prices, a ([[stock market crash]]), which can lead to a cascade of business failures, significant recessions and worst case depressions and [[Economic stagnation|stagnation]].
* [[Minsky Moment]]: Euphoria and speculative borrowing as well as unsustainable financial practices eventually result in economic downturns. A Minsky Moment marks the point at which [[Leverage (finance)|overleveraged]] investors are forced to sell off assets to cover their debts, leading to a rapid decline in asset prices and [[Liquidity risk|liquidity]]. This term is named after the American economist [[Hyman Minsky]], who theorized that financial markets are inherently unstable.

External shocks
* Adverse events: Unexpected major world events like [[natural disaster]]s and geopolitical events like [[war]]s can cause widespread disruptions in critical sectors in supply chains and disrupt economic activity, reduce productivity, increase costs, affect confidence and thereby diminish economic activity, leading to decreased spending and investment and finally recessions.
* Decline in external demand: For countries with strong [[export]] sectors, a decline in demand from major [[International trade|trading partners]] can trigger a recession.<ref name="auto"/>
* Global spillover effects: Recessions in one part of the world can have spillover effects on other economies due to global interconnectedness. For example, economic troubles in Europe can impact the U.S. economy.<ref>{{Cite web|url=https://news.stanford.edu/stories/2022/12/why-recessions-are-misunderstood|title=Recessions are difficult, but stagnant growth could prove more challenging, Stanford economist warns| last=Cochrane | first=John | date=December 7, 2022|website=Stanford University}}</ref>