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Overconsumption, Credit Rationing and Bailout Monetary Policy: A Minskyan Perspective

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Author Info

  • Matthieu Charpe

    (International Labor Organization Geneve, Switzerland)

  • Peter Flaschel

    (Bielefeld University, Germany)

  • Christian R. Proano

    ()
    (IMK at the Hans Boeckler Foundation)

  • Willi Semmler

    (New School Univeristy New York, USA)

Abstract

We consider a Keynes-Goodwin model of effective demand and the distributive cycle where workers purchase goods and houses with marginal propensity significantly larger than one. They therefore need credit, supplied from asset holders, and have to pay interest on their outstanding debt. In this initial situation, the steady state is attracting, while a marginal propensity closer to one makes it repelling. The stable excessive overconsumption case can easily turn from a stable boom to explosiveness and from there through induced processes of credit rationing into a devastating bust. In such a situation the Central Bank may prevent the worst by acting as creditor of last resort, purchasing loans where otherwise debt default (and bankruptcy regarding house ownership) would occur. This bail-out policy can stabilize the economy and also reduces the loss of homes of worker families.

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Bibliographic Info

Paper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Working Paper with number 04-2009.

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Length: 28 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:imk:wpaper:4-2009

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Keywords: mortgage loans; booms; debt default; busts; creditor of last resort.;

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  1. Adam B. Ashcraft & Til Schuermann, 2008. "Understanding the securitization of subprime mortgage credit," Staff Reports 318, Federal Reserve Bank of New York.
  2. Dell’Ariccia, G. & Igan, D. & Laeven, L., 2009. "Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market," Discussion Paper 2009-46 S, Tilburg University, Center for Economic Research.
  3. Amitava Krishna Dutt, 2006. "Maturity, Stagnation And Consumer Debt: A Steindlian Approach," Metroeconomica, Wiley Blackwell, vol. 57(3), pages 339-364, 07.
  4. Giovanni Dell'Ariccia & Luc Laeven & Deniz Igan, 2008. "Credit Booms and Lending Standards," IMF Working Papers 08/106, International Monetary Fund.
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Cited by:
  1. Giovanni Dosi & Giorgio Fagiolo & Mauro Napoletano & Andrea Roventini, 2012. "Income Distribution, Credit and Fiscal Policies in an Agent-Based Keynesian Model," Working Papers 03/2012, University of Verona, Department of Economics.
  2. repec:spo:wpecon:info:hdl:2441/eu4vqp9ompqllr09j0h130d0n is not listed on IDEAS
  3. Matthieu Charpe & Peter Flaschel, 2011. "Worker debt, default ans diversity of financial fragility," IMK Working Paper 5-2011, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  4. Charpe, Matthieu & Flaschel, Peter, 2013. "Workers’ debt, default and the diversity of financial fragilities," Structural Change and Economic Dynamics, Elsevier, vol. 27(C), pages 48-65.

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