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Margins of safety and instability in a macrodynamic model with Minskyan insights

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  • Nikolaidi, Maria

Abstract

This paper develops a stock-flow consistent macrodynamic model in which firms’ and banks’ desired margins of safety play a central role in macroeconomic performance. The model incorporates an active banking sector and pays particular attention to the leverage of both firms and banks. It is shown that the endogenous change in the desired margins of safety of firms and banks is likely to transform an otherwise stable debt-burdened economy into an unstable one. The endogeneity of the desired margins of safety can also produce, under certain conditions, investment and leverage cycles during which investment and leverage move both in the same and in the opposite direction. Furthermore, the paper investigates the potential stabilising role of fiscal policy. It is indicated that fiscal policy can reduce the destabilising forces in the macroeconomy when government expenditures adjust adequately to variations in the divergence between the actual and the desired margins of safety.

Suggested Citation

  • Nikolaidi, Maria, 2014. "Margins of safety and instability in a macrodynamic model with Minskyan insights," Structural Change and Economic Dynamics, Elsevier, vol. 31(C), pages 1-16.
    • Handle: RePEc:eee:streco:v:31:y:2014:i:c:p:1-16
    DOI: 10.1016/j.strueco.2014.07.001
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    More about this item

    Keywords

    Margins of safety; Instability; Leverage ratios; Minskyan macroeconomic analysis;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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