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Overconsumption, credit rationing and bailout monetary policy: A Minskyan perspective

Author

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  • Matthieu Charpe

    (International Labor Organization, Genve, Switzerland)

  • Peter Flaschel

    (Bielefeld University, Bielefeld, Germany)

  • Christian Proano

    (Macroeconomic Policy Institute (IMK), Duesseldorf, Germany)

  • Willi Semmler

    (New School University, New York, USA)

Abstract

We consider a Keynes-Goodwin model of effective demand and the distributive cycle where workers purchase goods and houses with a marginal propensity significantly larger than one. They therefore need credit, supplied from asset holders, and have to pay interest on their outstanding debt. In this initial situation, the steady state is attracting, while a marginal propensity closer to one makes it repelling. The stable excessive overconsumption case can easily turn from a stable boom to explosiveness and from there through induced processes of credit rationing into a devastating bust. In such a situation the central bank may prevent the worst by acting as creditor of last resort, purchasing loans where otherwise debt default (and bankruptcy regarding house ownership) would occur. This bail-out policy can stabilize the economy and also reduces the loss of homes of worker families.

Suggested Citation

  • Matthieu Charpe & Peter Flaschel & Christian Proano & Willi Semmler, 2009. "Overconsumption, credit rationing and bailout monetary policy: A Minskyan perspective," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 6(2), pages 247-270.
  • Handle: RePEc:elg:ejeepi:v:6:y:2009:i:2:p:247-270
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    References listed on IDEAS

    as
    1. Giovanni Dell’Ariccia & Deniz Igan & Luc Laeven, 2012. "Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 367-384, March.
    2. Amitava Krishna Dutt, 2006. "Maturity, Stagnation And Consumer Debt: A Steindlian Approach," Metroeconomica, Wiley Blackwell, vol. 57(3), pages 339-364, July.
    3. Ashcraft, Adam B. & Schuermann, Til, 2008. "Understanding the Securitization of Subprime Mortgage Credit," Foundations and Trends(R) in Finance, now publishers, vol. 2(3), pages 191-309, June.
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    Cited by:

    1. Francesco Saraceno, 2014. "High inequality and its impact on the economy," Post-Print hal-01053897, HAL.
    2. Greg Hannsgen & Tai Young-Taft, 2015. "Inside Money in a Kaldor-Kalecki-Steindl Fiscal Policy Model: The Unit of Account, Inflation, Leverage, and Financial Fragility," Economics Working Paper Archive wp_839, Levy Economics Institute.
    3. Maria Nikolaidi & Engelbert Stockhammer, 2017. "Minsky Models: A Structured Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 31(5), pages 1304-1331, December.
    4. Soon Ryoo, 2016. "Household debt and housing bubbles: a Minskian approach to boom-bust cycles," Journal of Evolutionary Economics, Springer, vol. 26(5), pages 971-1006, December.
    5. Dosi, Giovanni & Fagiolo, Giorgio & Napoletano, Mauro & Roventini, Andrea, 2013. "Income distribution, credit and fiscal policies in an agent-based Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1598-1625.
    6. Francesco Saraceno, 2014. "L'impact économique des fortes inégalités : problèmes et solutions," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(3), pages 187-200.
    7. repec:spo:wpecon:info:hdl:2441/eu4vqp9ompqllr09j0h130d0n is not listed on IDEAS
    8. Charpe, Matthieu & Flaschel, Peter, 2013. "Workers’ debt, default and the diversity of financial fragilities," Structural Change and Economic Dynamics, Elsevier, vol. 27(C), pages 48-65.
    9. Matthieu Charpe & Peter Flaschel, 2011. "Worker debt, default ans diversity of financial fragility," IMK Working Paper 5-2011, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    10. Colacchio, Giorgio, 2014. "Taxation, income redistribution and debt dynamics in a seven-equation model of the business cycle," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 140-165.
    11. Matthieu Charpe & Peter Flaschel & Christian R. Proaño, 2012. "Income Distribution, Credit Rationing And Households' Debt," Metroeconomica, Wiley Blackwell, vol. 63(3), pages 458-492, July.
    12. Soon Ryoo, 2013. "Minsky cycles in Keynesian models of growth and distribution," Review of Keynesian Economics, Edward Elgar Publishing, vol. 1(1), pages 37-60, January.

    More about this item

    Keywords

    mortgage loans; booms; debt default; busts; creditor of last resort;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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