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Net worth ratio, bank lending and financial instability

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  • Toshio Watanabe

    (Konan University)

Abstract

This paper extends a Minsky model by incorporating net worth ratio, which Steindl stressed the importance of in reference to financial markets. We construct a dynamic macroeconomic model comprising discrete equations of both the net worth ratio and interest rate. We investigate what factors bring the instability of the steady state. We show that the effect of asset income on consumption can contribute to economic stability following Lavoie (1995) and Hein (2007). On the other hand, the economy becomes unstable when a bank’s lending reaction is elastic with respect to the net worth ratio of the firm. When the steady state is a saddle point, the monetary policy is likely to shift the economy from an unstable path to a convergence path. It can be said that monetary policy may have a stabilizing effect in the long run, however, in practice, there would be considerable difficulties in accomplishing this.

Suggested Citation

  • Toshio Watanabe, 2016. "Net worth ratio, bank lending and financial instability," Evolutionary and Institutional Economics Review, Springer, vol. 13(1), pages 37-56, June.
    • Handle: RePEc:spr:eaiere:v:13:y:2016:i:1:d:10.1007_s40844-016-0038-1
    DOI: 10.1007/s40844-016-0038-1
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    References listed on IDEAS

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    1. Eckhard Hein, 2007. "Interest Rate, Debt, Distribution And Capital Accumulation In A Post‐Kaleckian Model," Metroeconomica, Wiley Blackwell, vol. 58(2), pages 310-339, May.
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    3. Ryoo, Soon, 2010. "Long waves and short cycles in a model of endogenous financial fragility," Journal of Economic Behavior & Organization, Elsevier, vol. 74(3), pages 163-186, June.
    4. 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.
    5. Roberto Dieci & Xue-Zhong He & Cars Hommes (ed.), 2014. "Nonlinear Economic Dynamics and Financial Modelling," Springer Books, Springer, edition 127, number 978-3-319-07470-2, September.
    6. Marc Lavoie, 1995. "Interest Rates In Post-Keynesian Models Of Growth And Distribution," Metroeconomica, Wiley Blackwell, vol. 46(2), pages 146-177, June.
    7. Amitava Krishna Dutt, 2006. "Maturity, Stagnation And Consumer Debt: A Steindlian Approach," Metroeconomica, Wiley Blackwell, vol. 57(3), pages 339-364, July.
    8. Bruce C. Greenwald & Joseph E. Stiglitz, 1993. "Financial Market Imperfections and Business Cycles," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(1), pages 77-114.
    9. Claudio H. Dos Santos, 2005. "A stock-flow consistent general framework for formal Minskyan analyses of closed economies," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 27(4), pages 712-735.
    10. 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..
    11. Soon Ryoo, 2013. "Bank profitability, leverage and financial instability: a Minsky–Harrod model," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 37(5), pages 1127-1160.
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    More about this item

    Keywords

    Minsky’s financial instability hypothesis; Bank behavior; Net worth ratio; 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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