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Contemporary Post Keynesian Analysis

Edited by L. Randall Wray and Mathew Forstater

Original articles by leading scholars of post Keynesian economics make up this authoritative collection. Current topics of the greatest interest are covered, such as: perspectives on current economic policy; post Keynesian approaches to monetary theory and policy; economic development, growth and inflation; Kaleckian perspectives on distribution; economic methodology; and history of heterodox economic theory. The contributors explore a variety of prevailing issues including: wage bargaining and monetary policy in the EMU; the meaning of money in the internet age; stability conditions for small open economies; and economic policies of sustainable development in countries transitioning to a market economy. Other enduring matters are examined through the lens of economic theorists – Kaleckian dynamics and evolutionary life cycles; a comparison between Keynes’s and Hayek’s economic theories; and an analysis of the power of the firm based on the work of Joan Robinson, to name a few.
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Chapter 3: Exploring the Economics of Euphoria: Using Post Keynesian Tools to Understand the US Bubble and its Aftermath

Robert W. Parenteau


Robert W. Parenteau INTRODUCTION During periods of prolonged economic growth and robust financial asset returns, an economics of euphoria, as the late Hy Minsky described it, can be described. Rising asset prices can act as an accelerant on investment spending and as a depressant on the household saving rate. These shifts can fuel boom conditions in the economy, further validating an asset price appreciation. A self-amplifying feedback loop is introduced, taking portfolio positions and economic behavior far from a sustainable path. Private sector deficit spending is encouraged by asset price appreciation. Eventually, private deficit spending leads to a private debt build-up, which in turn can bring the economy to a state of what Minsky termed financial fragility. However, under certain conditions, the emergence of the financial fragility in the later stages of asset bubbles can be thwarted. In a private closed economy, any attempt by businesses to deficit spend on capital equipment due to an equity bubble can be frustrated as household savings fall in response to the asset bubble. Rising profits, via the Keynes/Kalecki profit equation, result as investment spending increases exceed household savings increases. This improves the internal funds available for firms to service their debt, thereby reducing their financial fragility. By moving to the more realistic setting of an open economy with a government sector, financial fragility conditions become less likely to be thwarted. A private sector debt build-up will tend to arise during an asset bubble in an economy with a...

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