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Minsky's Acceleration Channel and the Role of Money

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Greg Hannsgen

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Abstract

Using Minsky (1986), this paper attempts to answer two questions: (1) How does policy affect real and nominal variables? and (2) How should monetary policy be conducted so as to improve the performance of the economy? Minsky asserted that rising interest rates, brought about by contractionary monetary policy, compromised the balance sheets of firms that had financed long-term positions in illiquid assets with short-term borrowing. As interest rates rose, the debt service costs of a project increased relative to the present discounted value of its future revenue streams. This approach accounts for the effects of interest rate policy on the economy, answering the first question. A model based on Minsky's theory confirms the plausibility of his theory. The model also shows that anti-inflationary policy destabilizes the economy and is therefore counterproductive, providing a partial answer to the second question. A vector autoregression analysis suggests that post-War U.S. data are consistent with Minsky's theory.

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Paper provided by Levy Economics Institute, The in its series Economics Working Paper Archive with number 384.

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Date of creation: Jul 2003
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Handle: RePEc:lev:wrkpap:384

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  5. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1994. "Inventory (Dis)Investment, Internal Finance Fluctuations, and the Business Cycle," Macroeconomics 9401001, EconWPA. [Downloadable!]
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  7. Marvin J. Barth III & Valerie A. Ramey, 2000. "The Cost Channel of Monetary Transmission," NBER Working Papers 7675, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Davidson, Paul, 1972. "Money and the Real World," Economic Journal, Royal Economic Society, vol. 82(325), pages 101-15, March. [Downloadable!] (restricted)
  14. Christina D. Romer & David H. Romer, 1990. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Working Papers 2966, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1996-2), pages 1-78. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Greg Hannsgen, 2004. "Gibson's Paradox, Monetary Policy, and the Emergence of Cycles," Economics Working Paper Archive 410, Levy Economics Institute, The. [Downloadable!]
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  2. Greg Hannsgen, 2006. "GibsonÕs Paradox II," Economics Working Paper Archive wp_448, Levy Economics Institute, The. [Downloadable!]
  3. Claudio H. Dos Santos, 2004. "A Stock-Flow Consistent General Framework for Minskyan Analysis of Closed Economics," Macroeconomics 0402028, EconWPA. [Downloadable!]
  4. Claudio dos Santos, 2004. "A Stock-Flow Consistent General Framework for Formal Minskyan Analyses of Closed Economies," Economics Working Paper Archive 403, Levy Economics Institute, The. [Downloadable!]
  5. Eric Tymoigne, 2006. "Asset Prices, Financial Fragility, and Central Banking," Economics Working Paper Archive wp_456, Levy Economics Institute, The. [Downloadable!]
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