This paper provides an alternative formalization of Minsky's theory of financial instability and examines the conditions under which perpetual cycles emerge from endogenous changes in financial practices. The main features of our model are found in its emphasis on (1) the interaction between debt and portfolio dynamics, (2) the importance of margins of safety in the evolution of firms' indebtedness, and (3) the decisive role of the dynamics of capital gains and expectations in asset markets. The general framework of financial instability is combined with two Keynesian models of growth and distribution (Kaleckian vs Kaldorian).
Peter Skott and Soon Ryoo
This paper examines the role of fiscal policy in a Keynesian OLG model. We show that (i) dynamic inefficiency in a neoclassical OLG model generates aggregate demand problems in a Keynesian version of the model, (ii) fiscal policy can be used to achieve full-employment growth, (iii) the required debt ratio is inversely related to both the growth rate and government consumption, and (iv) a simple and distributionally neutral tax scheme can maintain full employment in the face of variations in ‘household confidence.’
Soon Ryoo and Peter Skott
Most Kaleckian models assume a perfectly elastic labor supply, an assumption that is questionable for many developed economies. This paper presents simple labor-constrained Kaleckian models and uses these models to compare the implications of financialization under labor-constrained and dual-economy conditions. The paper complements the analysis in Skott and Ryoo (2008) which did not include labor-constrained Kaleckian economies. We show that for plausible parameter values the financial changes commonly associated with financialization tend to be expansionary in both dual-economy and labor-constrained settings.