Minsky from the Bottom Up - Formalising the Two-Price Model of Investment in a Simple Agent-based Framework

Abstract

This paper presents a fully formalised version of Hyman Minsky's two-price model of capital investment embedded in a macroeconomic model consisting of an agent-based sector of consumption goods firms as well as three strongly simplified aggregated sectors. In an innovation to the literature on Minsky models, the model is calibrated empirically using moments drawn from US data, demonstrating that it is capable of producing plausible time series. Simulations show that the individual investment and financing choices made by the agent-based firms lead to the emergence of business cycles at the aggregate level. Key aspects of the model can be closely related to central concepts from the financial accelerator literature and moreover, it is demonstrated through simulation experiments that expectations and sentiment dynamics play an important role, being able to amplify or dampen the cycles. It is also shown that the introduction of fiscal policy, monetary policy, or a restriction on firm dividend payouts can contribute to a stabilisation of the model.

Minsky’s financial instability hypothesis

“…Lima and Meirelles, 2007;Charles, 2008a;Ferri and Variato, 2010;Nishi, 2012;Sasaki and Fujita, 2012) or agent-based models (see e.g. Michell, 2014;Caiani et al, 2016;Di Guilmi and Carvalho, 2017;Jump et al, 2017;Pedrosa and Lang, 2018;Reissl, 2020).…”

“…Minskyan models have assumed that the interest rate is a positive function of the leverage ratio of firms (e.g. Keen, 1995;Asada, 2001;Charles, 2008a;Lojak, 2018;Giri et al, 2019;Reissl, 2020), of economic activity (e.g. Lima and Meirelles, 2007;Fazzari et al, 2008) or of the financial position of both the lenders and the borrowers (Delli Gatti et al, 2010).…”

“…Although the financial accelerator framework has been developed within New Keynesian models where output is supply-driven and money is not endogenous, financial accelerator-type mechanisms can also be found in Minskyan demand-side models (see e.g. Delli Gatti et al, 2010;Giri et al, 2019;Reissl, 2020).…”

“…In some Minskyan models firms are portrayed to increase the dividends that they provide to shareholders when their profitability is high and/or their indebtedness is low (see e.g. Charles, 2008b;Yilmaz and Stockhammer, 2019;Reissl, 2020). By doing so they can gradually increase their reliance on debt, contributing to the rise of financial fragility.…”

“…Many Minskyan models have shown that counter-cyclical fiscal policy can indeed play a stabilising role (e.g. Keen, 1995;Nasica and Raybaut, 2005;Nikolaidi, 2014;Dafermos, 2018;Kapeller et al, 2018;Reissl, 2020). However, while counter-cyclical fiscal policy can reduce economic fluctuations, it does not necessarily eliminate them.…”