Macroeconomics of Growth Cycles and Financial Instability

Macroeconomics of Growth Cycles and Financial Instability

New Directions in Modern Economics series

Piero Ferri

In light of the recent economic crisis and in keeping with Hyman Minsky’s analysis of financial instability, this book considers the important interaction between cycles and growth, via the interplay between demand, supply and real-world financial issues.

Chapter 11: A Growth Cycle Model

Piero Ferri

Subjects: economics and finance, post-keynesian economics


INTRODUCTION The recent turbulent events that have hit the world economy have helped to shake conclusions that seemed to have become consolidated. For instance, the idea that a leveraged consumer could feed a sustainable rate of growth has come under strong attack. Actually, an asymmetry of diagnoses is emerging. In fact, while lack of aggregate demand is now at the center of the stage, globalization and technical change were supposed to be the main factors at the root of the exceptional growth performance of the previous years. These forces were mainly viewed from a supply point of view and considered more as irreversible phenomena within a long-run perspective (see IMF, 2008) rather than as manifestations of an expansionary phase. The aim of the present chapter is to present a unified analysis that not only tries to integrate real and monetary aspects (see also Asada et al., 2006), but also demand and supply in a dynamic environment. In so doing, growth cycles will be considered and an attempt to link problems of fluctuations with growth processes will be pursued. In the literature, there are important examples in this direction. For instance, Minsky (1982) has tried to link cycles and growth, while Aoki and Yoshikawa (2007) have considered the role of aggregate demand in the process of growth. Our focus will be mainly on a medium-run perspective (see Solow, 2000), where the economy can deviate from long-run balanced growth and where growth cycles become the dominant phenomena, with deep Keynesian aspects. The...

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