The Missing Macro Link

Levy Economics Institute of Bard College Working Papers No. 753

25 Pages Posted: 9 Feb 2013

See all articles by Eugenio Caverzasi

Eugenio Caverzasi

Department of Economic and Social Sciences, Marche Polytechnic University, Ancona; University of Limerick

Date Written: February 8, 2013

Abstract

This paper addresses the critique of the aggregational problem attached to the financial instability hypothesis of Hyman Minsky. The core of this critique is based on the Kaleckian analytical framework and, in very broad terms, states that the expenditure of firms for investment is at the same time a source of income for the firms producing capital goods. Hence, even if investments are debt financed, as in Minsky’s analysis, the overall level of indebtedness of the firm sector remains unchanged, since the debts of investing firms are balanced by the income of capital goods-producing firms. According to the critics, Minsky incurs a fallacy of composition when he does not take this dynamic into account when applying his micro analysis of investment at the macro level. The aim of this paper is to clarify the consequences of debt-financed investments over the financial structure of an aggregate economy. Starting from the works of Michał Kalecki and Josef Steindl, we developed a stock-flow consistent analysis of a highly simplified economy under four different financial regimes: (1) debt-financed with no distributed profits, (2) debt-financed with distributed profits, (3) internally financed with no distributed profits, and (4) internally financed with distributed profits. The results of our investigation show that debt-financed investments do not lead to a worsening of the financial position of the firm sector only if specific assumptions are taken into account.

Keywords: Hyman Minsky, Financial Instability Hypothesis, Stock-flow Consistent, Financial Fragility, Debt Financing

JEL Classification: B5, E12

Suggested Citation

Caverzasi, Eugenio, The Missing Macro Link (February 8, 2013). Levy Economics Institute of Bard College Working Papers No. 753, Available at SSRN: https://ssrn.com/abstract=2213953 or http://dx.doi.org/10.2139/ssrn.2213953

Eugenio Caverzasi (Contact Author)

Department of Economic and Social Sciences, Marche Polytechnic University, Ancona ( email )

Piazzale Martelli 8
Ancona, 18039
Italy

University of Limerick ( email )

Limerick
Ireland

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