Debt cycles, instability and fiscal rules: a Godley–Minsky synthesis

Abstract

were two macroeconomists who 'saw the crisis coming'. This paper develops a simple macrodynamic model that synthesises some key perspectives of their analytical frameworks. The model incorporates Godley's financial balances approach and postulates that private sector's propensity to spend is driven by a stock-flow norm (the target net private debt-to-income ratio) that changes endogenously via a Minsky mechanism. It also includes two fiscal rules: a Maastricht-type fiscal rule, according to which the fiscal authorities adjust the government expenditures based on a target net government debt ratio; and a Godley-Minsky fiscal rule, which links government expenditures with private indebtedness following a counter-cyclical logic. The analysis shows that (i) the interaction between the propensity to spend and net private indebtedness can generate cycles and instability; (ii) instability is more likely when the propensity to spend responds strongly to deviations from the stock-flow norm and when the expectations that determine the stock-flow norm are highly sensitive to the economic cycle; (iii) the Maastricht-type fiscal rule is destabilising while the Godley-Minsky fiscal rule is stabilising; (iv) the paradox of debt can apply both to the private sector and the government sector.

Accounting Consistency in Kaleckian Models of Growth and Distribution: a Preliminary Step and a Research Agenda

“…Source: Authors' own elaboration, based on Dafermos (2017) and Vera (2009). 4 For more on this approach, see also Eatwell and Taylor (1999), Godley and McCarthy (1998), Santos (2004), Santos (2017), Santos and Oreiro (2019), Godley and Izurieta (2004), , Zezza (2009), Brecht et al (2012) and Rezende (2016).…”

An update on Kalecki–Minsky modelling

“…In terms of the key mechanisms that give rise to endogenous cycles, Nikolaidi/Stockhammer (2017) group the literature into those where debt plays the key role (for example, Asada 2001;Charles 2008) and those where asset prices are paramount (for example, Taylor/O'Connell 1985;Ryoo 2016). Within the debt-cycle group there are differences in the precise mechanisms, with some authors emphasizing the role of interest rates (Fazzari et al 2008) and others endogenous debt norms (Jump et al 2017;Dafermos 2018). While Minsky's original 2.…”

Minsky Models: A Structured Survey

“…The fifth group is the endogenous target debt ratio Minsky models (Dafermos, ; Jump et al ., ). In these models, the expenditures of the private sector and the dynamics of debt are affected by stock‐flow norms (target debt ratios).…”

“…The model of Nikolaidi (), described in the previous section, was the first model that used explicitly an endogenous target debt ratio. Dafermos () incorporated this idea of an endogenous target debt ratio into a Godleyan analytical framework. Following Godley's projection analysis (e.g.…”

“…In this system, the propensity to spend of the private sector increases (decreases) when the target debt‐to‐income ratio is higher (lower) than the actual one. Using the Poincaré–Bendixson theorem, Dafermos () shows that this system can produce cycles. Instability and cycles are more likely when the responsiveness of the propensity to spend to the target debt ratio is high.…”