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Debt cycles, instability and fiscal rules: a Godley-Minsky model

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  • Yannis Dafermos

    (University of the West of England, Bristol)

Abstract

Wynne Godley and Hyman Minsky were two macroeconomists who ‘saw the crisis coming’. This paper develops a simple macrodynamic model that synthesises some key perspectives of their analytical frameworks. The model incorporates Godley’s financial balances approach and postulates that private sector’s propensity to spend is driven by a stock-flow norm (the target net private debt-to-income ratio) that changes endogenously via a Minsky mechanism. It also includes two fiscal rules: a Maastricht-type fiscal rule, according to which the fiscal authorities adjust the government expenditures based on a target net government debt ratio; and a Godley-Minsky fiscal rule, which links government expenditures with private indebtedness following a counter-cyclical logic. The analysis shows that (i) the interaction between the propensity to spend and net private indebtedness can generate cycles and instability; (ii) instability is more likely when the propensity to spend responds strongly to deviations from the stock-flow norm and when the expectations that determine the stock-flow norm are highly sensitive to the economic cycle; (iii) the Maastricht-type fiscal rule is destabilising while the Godley-Minsky fiscal rule is stabilising; and (iv) the paradox of debt can apply both to the private sector and to the government sector.

Suggested Citation

  • Yannis Dafermos, 2015. "Debt cycles, instability and fiscal rules: a Godley-Minsky model," Working Papers 20151509, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
  • Handle: RePEc:uwe:wpaper:20151509
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    Cited by:

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    3. Maria Nikolaidi, 2017. "Three decades of modelling Minsky: what we have learned and the way forward," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 14(2), pages 222-237, September.
    4. Adam B. Barrett, 2017. "Stability of zero-growth economics analysed with a Minskyan model," Papers 1704.08161, arXiv.org, revised Nov 2017.
    5. Michalis Nikiforos & Gennaro Zezza, 2017. "Stock†Flow Consistent Macroeconomic Models: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 31(5), pages 1204-1239, December.

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    More about this item

    Keywords

    Godley; Minsky; debt cycles; instability; fiscal rules;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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