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Liquidity traps or Minsky crises: a critical review of the recent U.S. recession and Japan's Heisei recession in the 1990s

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  • Peter C. Y. Chow
  • Kevin R. Foster

Abstract

This paper reviews the Japanese growth recession from 1991 to 2001 and the recent U.S. financial crisis to determine the relevancy of the "liquidity trap" hypothesis (due originally to Keynes updated by Krugman) and a Minsky crisis hypothesis. To evaluate the Minsky hypothesis, we use the same data series that he used in his 1986 analysis and follow in his footsteps. These data clearly show increasing financial stress and fragility by 2005 in the United States. We find that elements of both hypotheses are useful in describing economic conditions and thus guiding policy choices. Current Fed policy in vastly expanding its balance sheet to support the financial sector is just the sort of policy that Minsky might have advocated.

Suggested Citation

  • Peter C. Y. Chow & Kevin R. Foster, 2010. "Liquidity traps or Minsky crises: a critical review of the recent U.S. recession and Japan's Heisei recession in the 1990s," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 32(4), pages 571-590, July.
  • Handle: RePEc:mes:postke:v:32:y:2010:i:4:p:571-590
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    References listed on IDEAS

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    Keywords

    financial crisis; liquidity trap; Minsky;

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