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Bank credit, expected inflation rate, and financial dynamics

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  • Toshio Watanabe

    (N/A)

Abstract

We investigate the effects of debt–capital ratio and expected inflation rate on the stability of the economy using a Minsky model and reconsidering Fisher’s debt-deflation theory. We have developed static and dynamic models that formalize an inflation-targeting policy. The static model reveals that an increase in the debt–capital ratio may negatively impact the profit rate and that the Fisher proposition is invalid. Our dynamic model indicates that the economy can become endogenously unstable. When the debt–capital ratio is high and the sensitivity of nominal wage rate to the profit rate is higher than that of bank lending, it may lead to debt-deflation. Finally, we demonstrate that the central bank alone can make only a limited contribution to economic stability.

Suggested Citation

  • Toshio Watanabe, 2025. "Bank credit, expected inflation rate, and financial dynamics," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 22(1), pages 9-31, April.
    • Handle: RePEc:elg:ejeepi:v:22:y:2025:i:1:p9-31
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    More about this item

    Keywords

    financial instability hypothesis; debt-deflation theory; bank behavior; portfolio selection; inflation-targeting policy;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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