Yannis Dafermos Yannis.Dafermos@uwe.ac.uk
Senior Lecturer in Economics
Debt cycles, instability and fiscal rules: A Godley-Minsky model
Dafermos, Yannis
Authors
Abstract
Wynne Godley and Hyman Minsky were two macroeconomists who ‘saw the crisis coming’. This paper develops a simple macrodynamic model that synthesises some key perspectives of their analytical frameworks. The model incorporates Godley’s financial balances approach and postulates that private sector’s propensity to spend is driven by a stock-flow norm (the target net private debt-to-income ratio) that changes endogenously via a Minsky mechanism. It also includes two fiscal rules: a Maastricht-type fiscal rule, according to which the fiscal authorities adjust the government expenditures based on a target net government debt ratio; and a Godley-Minsky fiscal rule, which links government expenditures with private indebtedness following a counter-cyclical logic. The analysis shows that (i) the interaction between the propensity to spend and net private indebtedness can generate cycles and instability; (ii) instability is more likely when the propensity to spend responds strongly to deviations from the stock-flow norm and when the expectations that determine the stock-flow norm are highly sensitive to the economic cycle; (iii) the Maastricht-type fiscal rule is destabilising while the Godley-Minsky fiscal rule is stabilising; and (iv) the paradox of debt can apply both to the private sector and to the government sector.
Citation
Dafermos, Y. (2015). Debt cycles, instability and fiscal rules: A Godley-Minsky model. Bristol
Publication Date | Sep 9, 2015 |
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Deposit Date | Sep 9, 2015 |
Publicly Available Date | Jun 17, 2016 |
Peer Reviewed | Not Peer Reviewed |
Keywords | Godley, Minsky, debt cycles, instability, fiscal rules |
Public URL | https://uwe-repository.worktribe.com/output/805904 |
Publisher URL | http://www1.uwe.ac.uk/bl/research/bristoleconomicanalysis/economicsworkingpapers.aspx |
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