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Corporate Liquidity and Financial Fragility: The Role of Investment, Debt and Interest

Author

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  • Jan Toporowski

    () (Department of Economics, SOAS, University of London, UK)

Abstract

The paper addresses the issue of how debt deflation may arise in a capitalist economy with a sophisticated credit system. It argues that the standard argument of debt deflationists, that debt-financed investment causes a build-up of unsustainable investment, fails to recognise that debt is back by credit. A corollary of this is that the rate of interest is not a factor in investment decisions. Financial fragility is caused by heterogeneity of balance sheets, debt financed operations in financial markets and insufficient debt-financed investment, rather than too much such investment.

Suggested Citation

  • Jan Toporowski, 2012. "Corporate Liquidity and Financial Fragility: The Role of Investment, Debt and Interest," Working Papers 169, Department of Economics, SOAS, University of London, UK.
  • Handle: RePEc:soa:wpaper:169
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    File URL: http://www.soas.ac.uk/economics/research/workingpapers/file74886.pdf
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    References listed on IDEAS

    as
    1. Eckhard Hein, 2007. "Interest Rate, Debt, Distribution And Capital Accumulation In A Post-Kaleckian Model," Metroeconomica, Wiley Blackwell, vol. 58(2), pages 310-339, May.
    2. Engelbert Stockhammer, 2004. "Financialisation and the slowdown of accumulation," Cambridge Journal of Economics, Oxford University Press, vol. 28(5), pages 719-741, September.
    3. Jan Toporowski, 2008. "Minsky's 'induced investment and business cycles'," Cambridge Journal of Economics, Oxford University Press, vol. 32(5), pages 725-737, September.
    4. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    5. Ruggles, Nancy & Ruggles, Richard, 1992. "Household and Enterprise Saving and Capital Formation in the United States: A Market Transactions View," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 38(2), pages 119-163, June.
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    Cited by:

    1. Mimoza Shabani & Jan Toporowski, 2015. "A Nobel Prize for the Empirical Analysis of Asset Prices," Review of Political Economy, Taylor & Francis Journals, vol. 27(1), pages 62-85, January.

    More about this item

    Keywords

    Debt; Interest; Investment; Crisis;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G01 - Financial Economics - - General - - - Financial Crises
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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