Feedback loops are an important concept in finance and economics. In a nutshell, positive feedback loops are pro-cyclical in that they act to make an economy more volatile by accentuating booms and then busts. By contrast, negative feedback loops are counter-cyclical in that they act to reduce volatility and make an economy more stable by mitigating boom/bust cycles.
Positive feedback loops come in various forms. With respect to the Australian housing market, one important positive feedback loop is the link between Australian home values and consumer confidence, borrowing, household expenditure and employment, often dubbed the “wealth effect”.
