Pro-cyclical effect.
The pro-cyclical effect refers to the phenomenon in which certain economic variables change in the same direction as overall economic activity in the economic cycle. When the economy is in a boom period, the pro-cyclical variable rises and decreases during a downturn. This effect can lead to cyclical fluctuations in the value of assets and liabilities.
The pro-cyclical effect is particularly pronounced in financial markets. In times of economic boom, credit expansion and market booms can lead to assets*** and thus overvalue related products. This can trigger excessive optimism and wrong decision-making among investors, further fueling the market's prosperity. Conversely, during economic downturns, credit crunches and market downturns can lead to undervaluation of asset***-related products. This can lead to pessimism and risk aversion among investors, further exacerbating the recession.
The existence of pro-cyclical effects makes economic volatility more intense and increases the instability of the financial system. In a financial crisis, pro-cyclical effects can lead to the formation and bursting of asset bubbles, as well as the accumulation of debt, further exacerbating economic recessions.
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