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Technology Shocks and Predictable Minsky Cycles

Jean-Paul L’Huillier, Gregory Phelan and Hunter Wieman
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Jean-Paul L’Huillier: Brandeis University,
Hunter Wieman: Williams College

Authors registered in the RePEc Author Service: Jean-Paul L'Huillier ()

No 2021-01, Department of Economics Working Papers from Department of Economics, Williams College

Abstract: Big technological improvements in a new, secondary sector lead to a period of excitement about the future prospects of the overall economy, generating boom-bust dynamics propagating through credit markets. Increased future capital prices relax collateral constraints today, leading to a boom before the realization of the shock. But reallocation of capital toward the secondary sector when the shock hits leads to a bust going forward. These cycles are perfectly foreseen in our model, making them markedly different from the typical narrative about unexpected financial shocks used to explain crises. In fact, these cycles echo Minsky’s original narrative for financial cycles, according to which “financial trauma occur as normal functioning event in a capitalistic economy. (Minsky, 1980)

Keywords: Endogenous cycles; boom-bust dynamics; optimism; credit markets; predictability. (search for similar items in EconPapers)
JEL-codes: E22 E23 E32 E44 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2021-01
New Economics Papers: this item is included in nep-fdg, nep-his, nep-mac and nep-pke
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