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Induced Investment and Business Cycles

Hyman P. Minsky

Edited by Dimitri B. Papadimitriou

This unique volume presents, for the first time in publication, the original Ph.D. thesis of Hyman P. Minsky, one of the most innovative thinkers on financial markets. Dimitri B. Papadimitriou’s introduction places the thesis in a modern context, and explains its relevance today. The thesis explores the relationship between induced investment, the constraints of financing investment, market structure, and the determinants of aggregate demand and business cycle performance. Forming the basis of his subsequent development of financial Keynesianism and his ‘Wall Street’ paradigm, Hyman Minsky investigates the relevance of the accelerator-multiplier models of investment to individual firm behaviour in undertaking investment dependent on cost structure. Uncertainty, the coexistence of other market structures, and the behaviour of the monetary system are also explored.
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Chapter 9: Monetary Behavior and Induced Investment

Hyman P. Minsky


1. INTRODUCTION Business cycle models based upon the interaction of the accelerator and multiplier have been mainly concerned with the implications of the formal model. That is, the pure model generates the cyclical time series, and the expository elements in the writings of the accelerationists have been primarily directed at the interpretation of the formal results. The processes by which investment is induced have not been considered in detail. We have taken up the transformation of the change in aggregate demand into the demand for investment goods. We now have to relate the demand for investment goods and the volume of realized investment; that is, we have to consider the supply side of the investment goods markets. Accelerator and multiplier models have considered the supply side of the investment market by introducing either lags, due to the gestation period of the capital goods, or ceilings, due to either full employment or the limited productive capacity of the investment goods industries.1 It often seems as if such factors are introduced mainly to get around the embarrassing results of the linear model. It is true that a non-linear accelerator-multiplier model is not limited to the unsatisfactory alternative states of a linear model. The non-linearity can be introduced in the formal model, as Goodwin and Hicks do, or in a model which determines the value of the accelerator coefficient. Neither Goodwin nor Hicks satisfactorily rationalizes the non-linearities they assume. In particular their analysis of the supply side of the investment goods markets...

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