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Minsky's Acceleration Channel and the Role of Money

  • Greg Hannsgen

    (The Levy Economics Institute of Bard College)

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 EconWPA in its series Macroeconomics with number 0308003.

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Length: 32 pages
Date of creation: 12 Aug 2003
Date of revision:
Handle: RePEc:wpa:wuwpma:0308003
Note: Type of Document - MS word; prepared on PC; to print on HP/PostScript; pages: 32; figures: included
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  18. Lavoie, M. & Seccareccia, M., 1999. "Minsky's Financial Fragility Hypothesis: a Missing Macroeconomic Link?," Working Papers 9904e, University of Ottawa, Department of Economics.
  19. Chirinko, Robert S. & Fazzari, Steven M. & Meyer, Andrew P., 1999. "How responsive is business capital formation to its user cost?: An exploration with micro data," Journal of Public Economics, Elsevier, vol. 74(1), pages 53-80, October.
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