Debt, Boom, Bust: A Theory of Minsky-Veblen Cycles
Sprache des Vortragstitels:
4th International Summer School on Keynesian Macroeconomics and European Economic Policies
Sprache des Tagungstitel:
This paper reflects on the development leading to the recent crisis and interprets this development as a series of events within a Minsky-Veblen Cycle. To illustrate this claim we introduce conspicuous consumption concerns, as described by Veblen, into a stock flow consistent Post Keynesian model and demonstrate that, under these conditions, a decrease in income equality leads to a corresponding increase in debt-financed consumption demand. Here Minskyian dynamics come into play: if perceived economic stability causes banks? margin of safety to decrease sufficiently, increased credit demand is accommodated by credit supply, giving rise to a debt-financed consumption boom. As the solvency of households decreases and interest rates move up, banks reduce lending, triggering household bankruptcies and, finally, a recession. What follows is a stable period of consolidation, where past debts are repaid, financial stability is regained and conspicuous consumption motives may gradually take over again. We illustrate this approach to the current crisis and its explanatory validity by extending our stock-flow consistent model into a dynamic simulation.