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Debt, Boom, Bust: A Theory of Minsky-Veblen Cycles

Jakob Kapeller () and Bernhard Schütz

No 2012-14, Economics working papers from Department of Economics, Johannes Kepler University Linz, Austria

Abstract: This paper reflects on the development leading to the recent crisis and interprets this development as a series of events within a Minsky-Veblen Cycle. To illustrate this claim we introduce conspicuous consumption concerns, as described by Veblen, into a stock flow consistent Post Keynesian model and demonstrate that, under these conditions, a decrease in income equality leads to a corresponding increase in debt-financed consumption demand. Here Minskyian dynamics come into play: increased credit demand leads to a corresponding rise in credit supply, which, eventually, gives rise to a debt-financed consumption boom. As the solvency of households decreases and interest rates move up, banks reduce lending, triggering household bankruptcies and, finally, a recession. What follows is a stable period of consolidation, where past debts are repaid, financial stability is regained and conspicuous consumption motives may gradually take over again. We illustrate this approach to the current crisis and its explanatory validity by extending our stock-flow consistent model into a dynamic simulation.

JEL-codes: B52 D11 E12 E20 G01 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-pke
Date: 2012-12
References: View references in EconPapers View complete reference list from CitEc
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Journal Article: Debt, boom, bust: a theory of Minsky-Veblen cycles (2014) Downloads
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