Minsky’s Theory of Inflation and its Theoretical and Empirical Relevance to Credit-Driven Economies

This article examines Minsky’s theory of inflation, as distinct from a monetary theory of inflation and a productivity-adjusted wage theory of inflation. Minsky’s view on money and banking will be elucidated in contrast to orthodox banking theories, drawing a causal relation from bank credit creation to aggregate demand, profits, and inflation. This article claims that his theory is particularly relevant to modern economies in which the globalization of the production process and the decline in the power of unions have mitigated wage-led inflation while financialization has amplified the business cycle and the movement in inflation over the previous forty years. In other words, excessive bank lending has underpinned aggregate spending, which created too much “claim” on consumer goods, thus precipitating profit-led inflation. By contrast, an unavoidable financial crisis and attempts, especially by households to pay off outstanding debt, dampened aggregate demand, thus causing a slowdown in profits and inflation.