Two types of Minsky cycles: investment-corporate debt cycles and speculative house price cycles

One of Tom Palley’s many contributions has been on developing Minsky’s theory of financial cycles and propose empirical tests for cycles with a central role for household debt (Palley 1994, 2011). Minsky developed a rich theoretical argument, but there is no canonical Minsky model. One feature that sets Minsky’s approach apart from mainstream models of financial instability is that it features endogenous cycles. Such models need an overshooting and a dampening force. Most of Minsky’s original writings were centered on business debt, with investment as the overshooting and business debt as the dampening force. In the Global Financial Crisis, however, household debt played the key role. This paper suggests that Minksy models can be grouped along two axes: whether the core cycle mechanisms is a real expenditures-debt interaction cycle or a speculative asset price cycle; and whether the indebted sector is businesses or households. Thus there are types of Minsky models. After reviewing empirical evidence the paper concludes that two are empirically particularly relevant: first, corporate debt seems to follow business investment-business debt interaction cycle; second for household debt speculative house price dynamics are the key driver and momentum trader-fundamentalist models help to understand these housing cycles.