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Debt cycles, instability and fiscal rules: A Godley-Minsky synthesis

Dafermos, Yannis



© The Author(s) 2017. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved. 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 the government sector.


Dafermos, Y. (2018). Debt cycles, instability and fiscal rules: A Godley-Minsky synthesis. Cambridge Journal of Economics, 42(5), 1277-1313.

Journal Article Type Article
Acceptance Date Jul 2, 2017
Online Publication Date Dec 27, 2017
Publication Date Sep 1, 2018
Deposit Date Jul 20, 2017
Publicly Available Date Dec 28, 2019
Journal Cambridge Journal of Economics
Print ISSN 0309-166X
Electronic ISSN 1464-3545
Publisher Oxford University Press (OUP)
Peer Reviewed Peer Reviewed
Volume 42
Issue 5
Pages 1277-1313
Keywords Godley, Minsky, debt cycles, instability, fiscal rules
Public URL
Publisher URL
Additional Information Additional Information : This is a pre-copyedited, author-produced version of an article accepted for publication in Cambridge Journal of Economics following peer review. The version of record [Dafermos, Y. (2017) Debt cycles, instability and fiscal rules: A Godley-Minsky synthesis. Cambridge Journal of Economics. ISSN 0309-166X] is available online at:


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