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Bank profitability, leverage and financial instability: a Minsky–Harrod model

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  • Soon Ryoo

Abstract

This paper develops a stock-flow-consistent macroeconomic model where bank profitability and bank leverage play a crucial role in the determination of firms' liability structure. The model assumes that banks' credit supply depends on bank profitability as well as firms' profit–interest ratio. Our analysis suggests that a strong expansionary effect of bank profitability on credit supply tends to destabilise the economy, leading to cycles driven by the interactions between firms' and banks' financial behaviour. The formal framework is used to discuss Hyman Minsky's proposal in his Stabilizing an Unstable Economy for the control over the permissible leverage ratios and payout ratios of banks. Copyright , Oxford University Press.

Suggested Citation

  • Soon Ryoo, 2013. "Bank profitability, leverage and financial instability: a Minsky–Harrod model," Cambridge Journal of Economics, Oxford University Press, vol. 37(5), pages 1127-1160.
  • Handle: RePEc:oup:cambje:v:37:y:2013:i:5:p:1127-1160
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    File URL: http://hdl.handle.net/10.1093/cje/bes078
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    Cited by:

    1. Michalis Nikiforos, 2013. "Uncertainty and Contradiction: An Essay on the Business Cycle," Economics Working Paper Archive wp_770, Levy Economics Institute.
    2. Piero Ferri & Annalisa Cristini & Anna Maria Variato, 2016. "Endogenous fluctuations, markups, capacity and credit constraints," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 11(2), pages 273-292, October.
    3. Nikolaidi, Maria, 2014. "Margins of safety and instability in a macrodynamic model with Minskyan insights," Structural Change and Economic Dynamics, Elsevier, vol. 31(C), pages 1-16.
    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. Engelbert Stockhammer & Joel Rabinovich & Niall Reddy, 2018. "Distribution, wealth and demand regimes in historical perspective," FMM Working Paper 14-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    6. Soon Ryoo & Yun K. Kim, 2014. "Income Distribution, Consumer Debt and Keeping up with the Joneses," Metroeconomica, Wiley Blackwell, vol. 65(4), pages 585-618, November.
    7. Matthew Holloway & Jari Eloranta, 2014. "“Stability breeds instability?” A Minskian analysis of the crisis of the Asian Tigers in the 1990s," Investigaciones de Historia Económica (IHE) Journal of the Spanish Economic History Association, Asociacion Espa–ola de Historia Economica, vol. 10(02), pages 115-126.
    8. Michalis Nikiforos, 2015. "Uncertainty and Contradiction: An Essay on the Business Cycle," Working Papers 1514, New School for Social Research, Department of Economics.
    9. Leila E. Davis - Joao Paulo A. de Souza y Gonzalo Hernandez & Joao Paulo A. de Souza & Gonzalo Hernandez, 2017. "An empirical analysis of Minsky regimes in the US economy," VNIVERSITAS ECONÓMICA 015495, UNIVERSIDAD JAVERIANA - BOGOTÁ.
    10. Rafael Wildauer, 2016. "Determinants of US household debt: New evidence from the SCF," Working Papers PKWP1608, Post Keynesian Economics Study Group (PKSG).
    11. Giuseppe Mastromatteo & Giuseppe Mastromatteo, 2016. "Minsky at Basel: A Global Cap to Build an Effective Postcrisis Banking Supervision Framework," Economics Working Paper Archive wp_875, Levy Economics Institute.
    12. Engelbert Stockhammer & Joel Rabinovich & Niall Reddy, 2018. "Distribution, wealth and demand regimes in historical perspective. USA, UK, France and Germany, 1855-2010," Working Papers PKWP1805, Post Keynesian Economics Study Group (PKSG).
    13. Stockhammer, Engelbert & Rabinovich, Joel & Reddy, Niall, 2017. "Distribution, wealth and demand regimes in historical perspective. USA, UK, France and Germany, 1855-2010," Economics Discussion Papers 2017-5, School of Economics, Kingston University London.

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