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Minsky's Acceleration Channel and the Role of Money

  • Greg Hannsgen

Using Minsky (1986), this paper attempts to answer two questions: (1) How does policy affect real and nominal variables? and (2) How should monetary policy be conducted so as to improve the performance of the economy? Minsky asserted that rising interest rates, brought about by contractionary monetary policy, compromised the balance sheets of firms that had financed long-term positions in illiquid assets with short-term borrowing. As interest rates rose, the debt service costs of a project increased relative to the present discounted value of its future revenue streams. This approach accounts for the effects of interest rate policy on the economy, answering the first question. A model based on Minsky's theory confirms the plausibility of his theory. The model also shows that anti-inflationary policy destabilizes the economy and is therefore counterproductive, providing a partial answer to the second question. A vector autoregression analysis suggests that post-War U.S. data are consistent with Minsky's theory.

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Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_384.

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Date of creation: Jul 2003
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Handle: RePEc:lev:wrkpap:wp_384
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  1. Barth, Marvin J III & Ramey, Valerie A, 2000. "The Cost Channel of Monetary Transmissions," University of California at San Diego, Economics Working Paper Series qt7rm5q9sk, Department of Economics, UC San Diego.
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  17. Gertler, M. & Gilchrist, S., 1992. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," Working Papers 92-08, C.V. Starr Center for Applied Economics, New York University.
  18. Marc Lavoie & Mario Seccareccia, 2001. "Minsky's financial fragility hypothesis: a missing macroeconomic link?," Chapters, in: Financial Fragility and Investment in the Capitalist Economy, chapter 4 Edward Elgar.
  19. Davidson, Paul, 1972. "Money and the Real World," Economic Journal, Royal Economic Society, vol. 82(325), pages 101-15, March.
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