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The Missing Macro Link

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  • Eugenio Caverzasi

Abstract

This paper addresses the critique of the aggregational problem attached to the financial instability hypothesis of Hyman Minsky. The core of this critique is based on the Kaleckian analytical framework and, in very broad terms, states that the expenditure of ï¬ rms for investment is at the same time a source of income for the ï¬ rms producing capital goods. Hence, even if investments are debt ï¬ nanced, as in Minsky's analysis, the overall level of indebtedness of the ï¬ rm sector remains unchanged, since the debts of investing ï¬ rms are balanced by the income of capital goods-producing ï¬ rms. According to the critics, Minsky incurs a fallacy of composition when he does not take this dynamic into account when applying his micro analysis of investment at the macro level. The aim of this paper is to clarify the consequences of debt-ï¬ nanced investments over the ï¬ nancial structure of an aggregate economy. Starting from the works of Michal Kalecki and Josef Steindl, we developed a stock-flow consistent analysis of a highly simpliï¬ ed economy under four different ï¬ nancial regimes: (1) debt-ï¬ nanced with no distributed profits, (2) debt-ï¬ nanced with distributed proï¬ ts, (3) internally ï¬ nanced with no distributed proï¬ ts, and (4) internally ï¬ nanced with distributed proï¬ ts. The results of our investigation show that debt-ï¬ nanced investments do not lead to a worsening of the ï¬ nancial position of the ï¬ rm sector only if specific assumptions are taken into account.

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  • Eugenio Caverzasi, 2013. "The Missing Macro Link," Economics Working Paper Archive wp_753, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_753
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    References listed on IDEAS

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    1. Lavoie, M, 1995. "Loansable Funds, Endogenous Money, and Minsky's Financial Fragility Hypothesis," Working Papers 95011e, University of Ottawa, Department of Economics.
    2. Gennaro Zezza, 2004. "Some Simple, Consistent Models of the Monetary Circuit," Macroeconomics 0405006, University Library of Munich, Germany.
    3. Eugenio Caverzasi & Antoine Godin, 2013. "Stock-flow Consistent Modeling through the Ages," Economics Working Paper Archive wp_745, Levy Economics Institute.
    4. Backus, David, et al, 1980. "A Model of U.S. Financial and Nonfinancial Economic Behavior," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(2), pages 259-293, Special I.
    5. Riccardo Bellofiore & Joseph Halevi, 2011. "A Minsky Moment? The Subprime Crisis and the ‘New’ Capitalism," Chapters, in: Claude Gnos & Louis-Philippe Rochon (ed.), Credit, Money and Macroeconomic Policy, chapter 1, Edward Elgar Publishing.
    6. Graziani,Augusto, 2003. "The Monetary Theory of Production," Cambridge Books, Cambridge University Press, number 9780521812115, October.
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    Cited by:

    1. Ítalo Pedrosa & Dany Lang, 2018. "Heterogeneity, distribution and financial fragility of non-financial firms: an agent-based stock-flow consistent (AB-SFC) model," Working Papers hal-01937186, HAL.
    2. Ítalo Pedrosa & Dany Lang, 2018. "Heterogeneity, distribution and financial fragility of non-financial firms: an agent-based stock-flow consistent (AB-SFC) model," CEPN Working Papers hal-01937186, HAL.

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    More about this item

    Keywords

    Hyman Minsky; Financial Instability Hypothesis; Stock-flow Consistent; Financial Fragility; Debt Financing;
    All these keywords.

    JEL classification:

    • B5 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory

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