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On the Minskyan Business Cycle

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  • Korkut A. Erturk

Abstract

The essential insight Minsky drew from Keynes was that optimistic expectations about the future create a margin, reflected in higher asset prices, which makes it possible for borrowers to access finance in the present. In other words, the capitalized expected future earnings work as the collateral against which firms can borrow in financial markets or from banks. But, then, the value of long-lived assets cannot be assessed on any firm basis, as they are highly sensitive to the degree of confidence that markets have about certain events and circumstances that will unfold in the future. This means that any sustained shortfall in economic performance in relation to the level of expectations that are already capitalized in asset prices may promote the view that asset prices are excessive. Once the view that asset prices are excessive takes hold in financial markets, higher asset prices cease to be a stimulant. Initially debt-led, the economy becomes debt-burdened. In this article, it is argued that Keynes's views on the alternation of the "bull" and "bear" sentiment and asset price speculation over the business cycle can explain two of Minsky's central propositions relative to business cycle turning points that have often been found less than fully persuasive: (1) that financial fragility increases gradually over the expansion, and, (2) that the interest rate sooner or later, increases setting off a downward spiral bringing the expansion to an end.

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Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_474.

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Date of creation: Aug 2006
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Handle: RePEc:lev:wrkpap:wp_474

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  1. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
  2. Andrei Shleifer ad Robert W. Vishny, 1995. "The Limits of Arbitrage," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1725, Harvard - Institute of Economic Research.
  3. Temin, Peter & Voth, Hans-Joachim, 2004. "Riding the South Sea Bubble," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4221, C.E.P.R. Discussion Papers.
  4. Hicks, J. R., 1975. "Value and Capital: An Inquiry into some Fundamental Principles of Economic Theory," OUP Catalogue, Oxford University Press, Oxford University Press, edition 2, number 9780198282693, October.
  5. Asimakopulos, A, 1983. "Kalecki and Keynes on Finance, Investment and Saving," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 7(3-4), pages 221-33, September.
  6. Davidson, Paul, 1972. "Money and the Real World," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 82(325), pages 101-15, March.
  7. Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 4(2), pages 19-33, Spring.
  8. Korkut A. Erturk, 2006. "Asset Price Bubbles, Liquidity Preference And The Business Cycle," Metroeconomica, Wiley Blackwell, Wiley Blackwell, vol. 57(2), pages 239-256, 05.
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Cited by:
  1. Leszek Kąsek & Marek Lubiński, 2010. "hyman," Contemporary Economics, University of Finance and Management in Warsaw, University of Finance and Management in Warsaw, vol. 4(1), March.
  2. Matthew Greenwood-Nimmo & Artur Tarassow, 2013. "A Macroeconometric Assessment of Minsky’s Financial Instability Hypothesis," Macroeconomics and Finance Series, Hamburg University, Department Wirtschaft und Politik 201306, Hamburg University, Department Wirtschaft und Politik.

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