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Dafermos, Yannis (2018) 'Debt cycles, instability and fiscal rules: a Godley–Minsky synthesis.' Cambridge Journal of Economics, 42 (5). pp. 1277-1313.

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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 the government sector.

Item Type: Journal Article
Keywords: Godley, Minsky, debt cycles, instability, fiscal rules
SOAS Departments & Centres: Departments and Subunits > Department of Economics
ISSN: 14643545
Copyright Statement: © The Author(s) 2017. This is an accepted manuscript of an article published by Oxford University Press in Cambridge Journal of Economics, available online: https://doi.org/10.1093/cje/bex046
DOI (Digital Object Identifier): https://doi.org/10.1093/cje/bex046
Date Deposited: 02 Sep 2019 13:56
URI: https://eprints.soas.ac.uk/id/eprint/31493
Related URLs: https://doi.org ... 1093/cje/bex046 (Publisher URL)

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