Financial Fragility and Investment in the Capitalist Economy The Economic Legacy of Hyman Minsky, Volume II
The Economic Legacy of Hyman Minsky, Volume II
Edited by Riccardo Bellofiore and Piero Ferri
Chapter 5: The macroeconomics of Minsky's investment theory
5. The macroeconomics of Minsky’s investment theory Steven M. Fazzari, Piero Ferri and Edward Greenberg 1 INTRODUCTION Investment plays a central role in Hyman Minsky’s extensive writing on the cyclical nature of modern capitalism. Minsky calls investment the ‘tune caller’ of the macroeconomic cycle. Minsky’s theory of investment is fundamentally ﬁnancial: cash ﬂow and debt are central determinants of investment spending. Moreover, investment is inherently cyclical. In Minsky’s own work the macroeconomic implications of his investment model are mostly derived informally, although a number of subsequent studies have formalized various aspects of his theory.1 This chapter contributes to research that quantitatively explores the cyclical macroeconomic dynamics arising from the Minsky investment theory. We embed a formalization of Minsky’s investment model within a macroeconomic framework based on Fazzari, Ferri and Greenberg (1998, hereafter FFG). This framework has the advantage that it assumes that ﬁrm production and pricing decisions take place in imperfectly competitive markets. Because of this assumption, the FFG model endogenously determines the links between aggregate demand, proﬁts and cash ﬂow – links central to Minsky’s investment model. The FFG model therefore provides a complementary macroeconomic framework in which to study the macroeconomic implications of Minsky’s ideas about investment. Section 2 presents a summary of Minsky’s theory of investment at the level of the ﬁrm. A full understanding of the determinants of investment requires a discussion of Minsky’s broader macroeconomic theory of the ﬁnancial business cycle, which we summarize in section 3. In section 4 we discuss modiﬁcations to...
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