Debt, Boom, Bust: A Theory of Minsky-Veblen Cycles
AbstractThis paper reflects on the development leading to the recent crisis and interprets this development as a series of events within a Minsky-Veblen Cycle. To illustrate this claim we introduce conspicuous consumption concerns, as described by Veblen, into a stock flow consistent Post Keynesian model and demonstrate that, under these conditions, a decrease in income equality leads to a corresponding increase in debt-financed consumption demand. Here Minskyian dynamics come into play: increased credit demand leads to a corresponding rise in credit supply, which, eventually, gives rise to a debt-financed consumption boom. As the solvency of households decreases and interest rates move up, banks reduce lending, triggering household bankruptcies and, finally, a recession. What follows is a stable period of consolidation, where past debts are repaid, financial stability is regained and conspicuous consumption motives may gradually take over again. We illustrate this approach to the current crisis and its explanatory validity by extending our stock-flow consistent model into a dynamic simulation.
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Bibliographic InfoPaper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2012-14.
Length: 34 pages
Date of creation: Dec 2012
Date of revision:
Find related papers by JEL classification:
- B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Institutional; Evolutionary
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
- E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
- G01 - Financial Economics - - General - - - Financial Crises
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-22 (All new papers)
- NEP-BAN-2012-12-22 (Banking)
- NEP-PKE-2012-12-22 (Post Keynesian Economics)
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