This paper develops a predator–prey model to explain cycles in credit-led economies. The predator is the part of the financial sector that issues credit money for non-output transactions. It increases the indebtedness ratio and inflates bubbles that eventually have a negative impact on the real rate of growth (the prey). From this basis, we build a couple of models that may lead to self-contained or explosive cycles. Even in the first case, there is a risk of a financial collapse when certain variables move far away from their long-term equilibrium positions. In order to tame the cycle and avoid extreme positions, governments should ban the expansion of credit money for the purchase of assets and introduce permanent checks to risky credit.
Óscar Dejuán and Daniel Dejuán-Bitriá
Óscar Dejuán and Eladio Febrero
Óscar Dejuán and John S. L. McCombie
Oscar Dejuán and John McCombie discuss how credit explosions leading to asset bubbles and an increasing burden of debt are an endemic disease of advanced capitalism. Indeed, even the traditional originate-to-hold model of banking is not free from such a virus. The novelty of the originate-to-distribute model of finance, based on the securitization of mortgage loans, is that it has assembled the machinery to accelerate the process. The limit to credit expansion derives from the potential (full capacity) growth of output. If there is a systematic gap between both rates, the credit-led growth will eventually become a debt- burdened growth.
Philip Arestis, Ana Rosa González and Óscar Dejuán
In this paper we derive a theoretical macro accumulation function, which relies on the accelerator principle and is complemented by utilizing capacity and profits. This investigation also accounts for several sources and kinds of uncertainty: exchange rates for financial uncertainty, oil prices for political uncertainty and interest rates for stock market uncertainty. The latter purports to account for the relationship between physical and financial investment. We also take on board the role of conventions in an attempt to account fully for uncertainty. In doing so, we include the relevant variables as deviations from their conventional levels. In the second part of the paper we estimate the investment function, by means of the system GMM in a panel of 12 OECD economies over the period 1970–2010.