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Financial Instability and Effects of Monetary Policy

Author

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  • Toshio Watanabe

    (Fukui Prefectural University, 4-1-1 Matsuoka-Kenjojima, Eiheiji-Town, Fukui 910-1195, Japan)

Abstract

Keynes and Minsky emphasize the effects of instability in the financial markets. We represent bank behavior and household portfolio preferences explicitly and investigate monetary policy effects on economic stabilization. Our model comprises dynamic equations for both the debtcapital ratio and the interest rate monetary policy. We show that the economy becomes unstable when the equity demand from households is sensitive to the debt-capital ratio. Further, we indicate that it is hard to change an unstable state into a stable state by changing monetary policy alone. We point out the need for financial regulations to make central bank policy effective.

Suggested Citation

  • Toshio Watanabe, 2020. "Financial Instability and Effects of Monetary Policy," Bulletin of Political Economy, Bulletin of Political Economy, vol. 14(1), pages 117-145, June.
    • Handle: RePEc:awu:journl:v:14:y:2020:i:1:p:117-145
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    References listed on IDEAS

    as
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    4. Sebastien Charles, 2008. "A Post-Keynesian Model of Accumulation with a Minskyan Financial Structure," Review of Political Economy, Taylor & Francis Journals, vol. 20(3), pages 319-331.
    5. Marc Lavoie & Wynne Godley, 2012. "Kaleckian Models of Growth in a Coherent Stock–Flow Monetary Framework: A Kaldorian View," Palgrave Macmillan Books, in: Marc Lavoie & Gennaro Zezza (ed.), The Stock-Flow Consistent Approach, chapter 6, pages 123-156, Palgrave Macmillan.
    6. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    7. Sébastien Charles, 2016. "Is Minsky’s financial instability hypothesis valid?," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 40(2), pages 427-436.
    8. Hideyuki Adachi & Atsushi Miyake, 2015. "A Macrodynamic Analysis of Financial Instability," World Scientific Book Chapters, in: Hideyuki Adachi & Tamotsu Nakamura & Yasuyuki Osumi (ed.), Studies in Medium-Run Macroeconomics Growth, Fluctuations, Unemployment, Inequality and Policies, chapter 5, pages 117-146, World Scientific Publishing Co. Pte. Ltd..
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Bank behavior; Debt-capital ratio; Minsky’s financial instability hypothesis; Monetary policy;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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