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Overconsumption, Credit Rationing and Bailout Monetary Policy: A Minskyan Perspective

  • Matthieu Charpe

    (International Labor Organization Geneve, Switzerland)

  • Peter Flaschel

    (Bielefeld University, Germany)

  • Christian R. Proano

    ()

    (IMK at the Hans Boeckler Foundation)

  • Willi Semmler

    (New School Univeristy New York, USA)

We consider a Keynes-Goodwin model of effective demand and the distributive cycle where workers purchase goods and houses with 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.

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Paper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Working Paper with number 04-2009.

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Length: 28 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:imk:wpaper:4-2009
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  1. Adam B. Ashcraft & Til Schuermann, 2008. "Understanding the securitization of subprime mortgage credit," Staff Reports 318, Federal Reserve Bank of New York.
  2. DellAriccia, Giovanni & Igan, Deniz & Laeven, Luc, 2008. "Credit Booms and Lending Standards: Evidence From The Subprime Mortgage Market," CEPR Discussion Papers 6683, C.E.P.R. Discussion Papers.
  3. Amitava Krishna Dutt, 2006. "Maturity, Stagnation And Consumer Debt: A Steindlian Approach," Metroeconomica, Wiley Blackwell, vol. 57(3), pages 339-364, 07.
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