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Coupling Cycle Mechanisms: Minsky debt cycles and the Multiplier-Accelerator

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  • S. Devrim Yilmaz

    () (Agence Francaise de Developpement)

  • Engelbert Stockhammer

    () (King's College London)

Abstract

While there exists a substantial literature on different business cycle mechanisms, there is little literature on economies with more than one business cycle mechanism operating and the relation of stability of these subsystems with the stability of the aggregate system. We construct a model where a multiplier-accelerator subsystem in output-investment space (a real cycle) and a Minskyian subsystem in investment- debt space (a financial cycle) can generate stable/unstable cycles in 2D in isolation. We then derive a theorem showing that if two independent cycle mechanisms that generate stable closed orbits in 2D share a self-destabilizing common variable and the true representation of the system is a fully-coupled 3D system where a weighted average of the common variable is in effect, then the 3D system will generate locally stable closed orbits in 3D if and only if the subsystems have the same frequencies and/or the self-destabilizing effects of the common variable evaluated at the fixed point are equal in both subsystems. Our results indicate that in the presence of multiple cycle mechanisms which share common variables in an economy, the stability of the aggregate economy crucially depends on the frequencies of these sub-cycle mechanisms.

Suggested Citation

  • S. Devrim Yilmaz & Engelbert Stockhammer, 2019. "Coupling Cycle Mechanisms: Minsky debt cycles and the Multiplier-Accelerator," CEPN Working Papers 2019-02, Centre d'Economie de l'Université de Paris Nord.
  • Handle: RePEc:upn:wpaper:2019-02
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    References listed on IDEAS

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    1. Passarella, Marco, 2012. "A simplified stock-flow consistent dynamic model of the systemic financial fragility in the ‘New Capitalism’," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 570-582.
    2. Ryoo, Soon, 2010. "Long waves and short cycles in a model of endogenous financial fragility," Journal of Economic Behavior & Organization, Elsevier, vol. 74(3), pages 163-186, June.
    3. Grasselli, Matheus R. & Nguyen-Huu, Adrien, 2018. "Inventory growth cycles with debt-financed investment," Structural Change and Economic Dynamics, Elsevier, vol. 44(C), pages 1-13.
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    7. Sébastien Charles, 2008. "Corporate debt, variable retention rate and the appearance of financial fragility," Cambridge Journal of Economics, Oxford University Press, vol. 32(5), pages 781-795, September.
    8. Sébastien Charles, 2016. "Is Minsky’s financial instability hypothesis valid?," Cambridge Journal of Economics, Oxford University Press, vol. 40(2), pages 427-436.
    9. Sordi, Serena & Vercelli, Alessandro, 2014. "Unemployment, income distribution and debt-financed investment in a growth cycle model," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 325-348.
    10. J. Maurice Clark, 1917. "Business Acceleration and the Law of Demand: A Technical Factor in Economic Cycles," Journal of Political Economy, University of Chicago Press, vol. 25, pages 217-217.
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    More about this item

    Keywords

    Business cycles; Minsky models; Multiplier-accelerator;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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