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Corporate Liquidity and Financial Fragility: The Role of Investment, Debt and Interest

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  • Jan Toporowski

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    (Department of Economics, SOAS, University of London, UK)

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    Abstract

    The paper addresses the issue of how debt deflation may arise in a capitalist economy with a sophisticated credit system. It argues that the standard argument of debt deflationists, that debt-financed investment causes a build-up of unsustainable investment, fails to recognise that debt is back by credit. A corollary of this is that the rate of interest is not a factor in investment decisions. Financial fragility is caused by heterogeneity of balance sheets, debt financed operations in financial markets and insufficient debt-financed investment, rather than too much such investment.

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    File URL: http://www.soas.ac.uk/economics/research/workingpapers/file74886.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, SOAS, University of London, UK in its series Working Papers with number 169.

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    Length: 14 pages
    Date of creation: Mar 2012
    Date of revision:
    Handle: RePEc:soa:wpaper:169

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    Web page: http://www.soas.ac.uk/economics/
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    Keywords: Debt; Interest; Investment; Crisis;

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    1. Hein, Eckhard, 2004. "Interest rate, debt, distribution and capital accumulation in a post-Kaleckian model," WSI Discussion Papers 133, Wirtschafts- und Sozialwissenschaftliches Institut (WSI), Hans-Böckler-Stiftung.
    2. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    3. Engelbert Stockhammer, 2004. "Financialisation and the slowdown of accumulation," Cambridge Journal of Economics, Oxford University Press, vol. 28(5), pages 719-741, September.
    4. Jan Toporowski, 2008. "Minsky's 'induced investment and business cycles'," Cambridge Journal of Economics, Oxford University Press, vol. 32(5), pages 725-737, September.
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