A monetary Minsky model of the Great Moderation and the Great Recession

Keen, Steve

doi:10.1016/j.jebo.2011.01.010

Cited by 128 publications

(102 citation statements)

References 27 publications

(13 reference statements)

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“…House prices increased with the insufficient change in the quantity of houses available to purchase. -What determines house prices... is the number of people who have taken out a mortgage, and the dollar value of those mortgages ... For changes in house prices, what matters is the acceleration of mortgage debt‖ (Keen, 2013). By this acceleration, the financial sector not only further disengaged from the real sector (housing construction) but due to the limited availability of land and the general illiquidity of real estate it became the primary determinant of increasing the sale price (most of which is non-GDP).…”

Section: In the Real World Credit/leverage Now Far Exceeds The Real mentioning

confidence: 99%

The On-Going Price of Perceiving Money as a Veil

Phillips¹

2017

IJEF

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Until macroeconomic theory rebuffs the nature of finance, which is leverage (debt claims and credit instruments above current GDP output), shadow-banking will continue to lure capital into the financial sector, lower institutional banking interest rates, and de-incentivize commercial lending from the real sector, even at competitive risk-adjusted rates. This institutionalized misallocation of credit undermines the tidy neoclassical -circular flow‖ apparatus where savings and earnings are allegedly pooled and then recycled through financial intermediaries into dynamic investment.Despite the mathematical complexity of DSGE models, the last financial crisis and its aftermath exposed the models' inadequacy for forecasting or even fully capturing economic reality. With no dynamic function for money, incorporating credit into the theoretical mindset of mainstream economics, including both neoliberal and (Post)-Keynesian traditions, has proven as yet unattainable. Holding fast to a (barter-like) Walrasian worldview, wherein the neutrality of money in the long-run, has meant debt does not exist and credit aggregates are not considered due to an a-historical mis-conceptualization of money/credit. As long as money, credit and debt are not accorded special roles, a bloated financial sector may well contribute to the suboptimal allocation of talents. This Article shows how by design, DSGE models do not recognize either credit's beneficent growth properties, or credit's aptitude to precipitate crisis by augmenting, largely non-GDP financial income, while in the long-run simultaneously reducing earned income (GDP recognized).

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Section: In the Real World Credit/leverage Now Far Exceeds The Real mentioning

confidence: 99%

The On-Going Price of Perceiving Money as a Veil

Phillips¹

2017

IJEF

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“…Therefore, the framework of FEOE of mismanagement of balance sheets can be viewed as the generalization of the Austrian credit cycle theories [58], Irving Fisher's debt deflation theory [59], and Minsky's financial instability theory [60][61][62].…”

Section: Generalization Of Austrian Schools' Work On Credit Fisher'smentioning

confidence: 99%

A Scientific Macroeconomic Model Derived from Fundamental Equation of Economics

Wayne

2014

SSRN Journal

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The poor performance of macroeconomic models during the great recession of 2008 has forced many economists to re-examine macroeconomic theories, and search for creditable alternatives to the popular dynamic stochastic general equilibrium (DSGE) models. This paper derives a new macroeconomic model from recently published Fundamental Equation of Economics (FEOE) and applies the new model to answer a general question what causes economic crises. The macro model known as the indeterministic balance sheet plus (IBS+) model proposed in this paper for the first time turns out to be a special breed of accounting models. Different accounting models are more or less same in the way of handling empirical accounting data and flow of funds, and different in the way of forecasting the future. The IBS+ macroeconomic model takes the indeterministic view of the future balance sheets with the emphasis on probabilistic causalities, tail risks, economic reality described by balance sheet accounting, truthfully capturing the sectorial flow of funds and dynamics of economics, universally applicability, and a rock solid scientific theoretical foundation. The IBS+ model is very different from the popular dynamic stochastic general equilibrium (DSGE) models and agent-based computational economic (ACE) models. Through a side by side comparison, we prove that IBS+ model is superior to DSGE or ACE models in many ways. This paper concludes that DSGE models are probably intellectual dead ends, and economists should stop investing heavily with DSGE models and instead should replace DSGE models with IBS+ models. Economic crises have plagued humanity since the dawn of capitalism. Despite intense studies over last several hundred years, the questions about causes, forecasting, and prevention of economic crises remains unsolved. This paper proposes a classification of causes of economic crises using IBS+ models to analyze balance sheets of key economic sectors. Applying this classification to examine recent economic crises, we conclude that most economic crises are caused by mismanagement of balance sheets by key economic players. This paper suggests that economic crises are largely caused by inevitable misbehavior of humanity and not caused by any fundamental flaw of capitalism. Just like improving the individual health and personal hygiene is the key to prevent epidemic diseases in societies, the key to prevent future economic crises is to promoting financial disciplines and strengthening risk management of key players in economics. Because some economic crises can be caused by natural and man-made factors beyond the scope of economics like earthquakes and wars, the frequency of economic crises can be minimized by proper risk management practices but economic crises can never be completely eliminated. Historically, treating mismanagement of balance sheets as main causes of economic crises is a generalization of Austrian business cycle theory, Fisher's debt deflation theory, and Minsky's financial instability hypothesis.

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“…He himself relied on his model on many occasions to explain the global financial crisis (Keen 2009a;2009b;2009c;2013a) and warn about a possible future crash (Keen 2013b). The Keen model has thus gained considerable attention, inside and outside academia.…”

Section: Introductionmentioning

confidence: 99%

“…Keen (2008;2009a) developed a dynamical system describing the mechanism of a monetary economy, which he connected to his Minsky model in Keen (2013a). The latter finally rejoins the two hobby-horses of Steve Keen: the importance of debt in explaining economic crisis and stagnation, and money creation from banks as the main channel of debt formation.…”

Section: Introductionmentioning

confidence: 99%

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Debt and investment in the Keen model: a reappraisal of modelling Minsky

Nguyen-Huu

Pottier

2017

Review of Keynesian Economics

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We examine to what extent the Keen model (Keen 1995) is a faithful modelling of Minsky's financial instability hypothesis. We focus on debt, money, and debt-induced crisis. We propose a clear interpretation of the debt: households lend unconsumed income to firms to finance their investments, and money creation is not necessary. We offer a detailed description of the economic collapse and analyse its causes thanks to numerical experiments. The crisis is triggered by profits squeezed by wages and not by debt overhang. We test alternative assumptions on the investors' behaviour to show that behaviour at very low profits is fundamental. We conclude that the Keen crisis has few Minskyan flavours.

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A monetary Minsky model of the Great Moderation and the Great Recession

Cited by 128 publications

References 27 publications

The On-Going Price of Perceiving Money as a Veil

The On-Going Price of Perceiving Money as a Veil

A Scientific Macroeconomic Model Derived from Fundamental Equation of Economics

Debt and investment in the Keen model: a reappraisal of modelling Minsky

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