Debt, boom, bust: a theory of Minsky-Veblen cycles

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis 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: increased credit demand leads to a corresponding rise in credit supply, which, eventually, gives 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.JEL classification numbers: B52, D11, E12, E20, G01

Have we been here before? Phases of financialization within the twentieth century in the US

“…A similar conclusion is reached by Kapeller and Schütz (2014), according to whom the need of lower-income households to preserve 12. For a discussion on the links between financialization and inequality, see for example Lin and Tomaskovic-Devey (2013).…”

Expenditure Cascades, Low Interest Rates or Property Booms? Determinants of Household Debt in OECD Countries

“…Kumhof et al (2012) have proposed a two-class DSGE model where poor households are pushed into debt as they are trying to maintain their consumption levels. Several authors (Frank et al 2014;Kapeller & Schütz 2014;Ryoo & Kim 2014;Behringer & Treeck 2013) have argued that rapidly growing top incomes lead to rising household debt if consumers follow social norms and imitate the lifestyle and expenses of richer peers. This latter argument is based on a behavioural economics approach, in particular otherregarding social norms for which there exists empirical support especially in the context of consumption and saving (Alvarez-Cuadrado & Japaridze 2017; Kim et al 2015;Drechsel-Grau & Schmid 2014).…”

“…The result is a cascade of debt-financed status expenditures flowing downwards from the top of the income distribution; thus we use the term expenditure cascades hypothesis (ECH). Several authors have incorporated these assumptions in Post Keynesian macroeconomic models (Belabed et al 2013;Kapeller & Schütz 2014;Ryoo & Kim 2014;Cardaci 2014). A similar explanation of increased household borrowing posits that households (building on prospect theory) do not want to reduce consumption below levels reached in the past or below a minimum level.…”

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“…Thus, an increase in inequality has a positive effect on consumption (Frank 1985;Frank et al 2014). Several authors have incorporated these assumptions into Kaleckian macroeconomic models (Belabed et al 2013;Kapeller and Schütz 2014). wage earners own homes. The overall effect of the wage share on investment is thus ambiguous.…”