Circuit theory extended: The role of speculation in crises
This paper asks why modern finance theory and the efficient market hypothesis have failed to explain long-term carry trades; persistent asset bubbles or zero lower bounds; and financial crises. It extends Godley and Lavoie (Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth, 2007) and the Theory of the Monetary Circuit to give a mathematical representation of Minsky's Financial Instability Hypothesis. In the extended circuit, the central bank rate is not neutral and the path is non-ergodic. The extended circuit has survival constraints that include a living wage, a zero interest rate and an upper interest rate. Inflation is everywhere. The possibility of stable carry trades emerges. In high interest rate, hedge economies, powerful banks invest surplus loan interest. With speculation, banks lobby to enter investment markets and the system is precariously liquid/illiquid. In a Ponzi economy, where loans never get repaid, solvency is a balance between increasing reserves, reducing interest rates and rebuilding banks' balance sheets during systemic crises. Simulating bank bailouts, household bailouts and a Keynesian boost suggests that bank bailouts are the least effective intervention, exerting downward pressure on wages and household spending: austerity.
Volume (Year): 6 (2012)
Issue (Month): ()
|Contact details of provider:|| Postal: Kiellinie 66, D-24105 Kiel|
Phone: +49 431 8814-1
Fax: +49 431 8814528
Web page: http://www.economics-ejournal.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fischer, Christoph, 2002.
"Real currency appreciation in accession countries: Balassa-Samuelson and investment demand,"
Discussion Paper Series 1: Economic Studies
2002,19, Deutsche Bundesbank, Research Centre.
- Christoph Fischer, 2004. "Real currency appreciation in accession countries: Balassa-Samuelson and investment demand," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 140(2), pages 179-210, June.
- Fischer, Christoph, 2002. "Real currency appreciation in accession countries: Balassa-Samuelson and investment demand," BOFIT Discussion Papers 8/2002, Bank of Finland, Institute for Economies in Transition.
- Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
- Hyman P. Minsky, 1992. "The Financial Instability Hypothesis," Economics Working Paper Archive wp_74, Levy Economics Institute.
- Christian Hellwig & Guido Lorenzoni, 2006.
"Bubbles and Self-Enforcing Debt,"
NBER Working Papers
12614, National Bureau of Economic Research, Inc.
- Alvaro Angeriz & Philip Arestis, 2007. "Monetary policy in the UK," Cambridge Journal of Economics, Oxford University Press, vol. 31(6), pages 863-884, November.
- Péter Karádi & Miklós Koren, 2008.
"A Spatial Explanation for the Balassa-Samuelson Effect,"
CeFiG Working Papers
4, Center for Firms in the Global Economy, revised 01 Oct 2008.
- Miklos Koren & Peter Karadi, 2009. "A Spatial Explanation for the Balassa-Samuelson Effect," 2009 Meeting Papers 891, Society for Economic Dynamics.
- Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
- Keen, Steve, 2010.
"Solving the paradox of monetary profits,"
Economics Discussion Papers
2010-2, Kiel Institute for the World Economy (IfW).
- Keen, Steve, 2010. "Solving the paradox of monetary profits," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 4, pages 1-32.
- Marco Veronese Passarella & Malcolm Sawyer, 2014. "Financialisation in the circuit," Working papers wpaper18, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
- Stephan Schulmeister, 2005.
"The Interaction between Technical Currency Trading and Exchange Rate Fluctuations,"
WIFO Working Papers
- Schulmeister, Stephan, 2006. "The interaction between technical currency trading and exchange rate fluctuations," Finance Research Letters, Elsevier, vol. 3(3), pages 212-233, September.
- Stephan Schulmeister, 2005. "The Interaction between Technical Currency Trading and Exchange Rate Fluctuations," Finance 0512033, EconWPA.
- Philip Arestis, 2009. "New Consensus Macroeconomics: A Critical Appraisal," Economics Working Paper Archive wp_564, Levy Economics Institute.
When requesting a correction, please mention this item's handle: RePEc:zbw:ifweej:201234. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.