Minsky's Acceleration Channel and the Role of MoneyMacroeconomics from EconWPA Abstract: Using Minsky (1986), this paper attempts to answer two questions: (1) How does policy affect real and nominal variables? and (2) How should monetary policy be conducted so as to improve the performance of the economy? Minsky asserted that rising interest rates, brought about by contractionary monetary policy, compromised the balance sheets of firms that had financed long-term positions in illiquid assets with short-term borrowing. As interest rates rose, the debt service costs of a project increased relative to the present discounted value of its future revenue streams. This approach accounts for the effects of interest rate policy on the economy, answering the first question. A model based on Minsky's theory confirms the plausibility of his theory. The model also shows that anti-inflationary policy destabilizes the economy and is therefore counterproductive, providing a partial answer to the second question. A vector autoregression analysis suggests that post-War U.S. data are consistent with Minsky's theory. Keywords: Monetary Policy; Endogenous Money; Minsky's Financial Fragility Hypothesis; Vector Autoregression (VAR) (search for similar items in EconPapers) Downloads: (external link) Related works: Access Statistics for this paper More papers in Macroeconomics from EconWPA |
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