Overconsumption, credit rationing and bailout monetary policy: A Minskyan perspective

Matthieu Charpe, Peter Flaschel, Christian Proaño and Willi Semmler

European Journal of Economics and Economic Policies: Intervention, 2009, vol. 6, issue 2, 247-270

Abstract: We consider a Keynes-Goodwin model of effective demand and the distributive cycle where workers purchase goods and houses with a marginal propensity significantly larger than one. They therefore need credit, supplied from asset holders, and have to pay interest on their outstanding debt. In this initial situation, the steady state is attracting, while a marginal propensity closer to one makes it repelling. The stable excessive overconsumption case can easily turn from a stable boom to explosiveness and from there through induced processes of credit rationing into a devastating bust. In such a situation the central bank may prevent the worst by acting as creditor of last resort, purchasing loans where otherwise debt default (and bankruptcy regarding house ownership) would occur. This bail-out policy can stabilize the economy and also reduces the loss of homes of worker families.

Keywords: mortgage loans; booms; debt default; busts; creditor of last resort (search for similar items in EconPapers)
JEL-codes: E24 E31 E32 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (22)

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Working Paper: Overconsumption, Credit Rationing and Bailout Monetary Policy: A Minskyan Perspective (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:elg:ejeepi:v:6:y:2009:i:2:p:247-270

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