Macroeconomics of Growth Cycles and Financial Instability
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Macroeconomics of Growth Cycles and Financial Instability

  • New Directions in Modern Economics series

Piero Ferri

In light of the recent economic crisis and in keeping with Hyman Minsky’s analysis of financial instability, this book considers the important interaction between cycles and growth, via the interplay between demand, supply and real-world financial issues.
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Chapter 8: A Dynamic Macro Model

Piero Ferri

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8. 1. A dynamic macro model TOWARDS ENDOGENOUS DYNAMICS In dealing with the problem of self adjustment by the markets, we have raised the necessity of carrying out a dynamic analysis. As is well known, there are different ways of pursuing this target. For instance, the ‘new synthesis’ models favor an exogenous interpretation of economic dynamics. Their models are based upon a stochastic approach, they are micro founded, and linearized around the steady state values. The dynamic stochastic general equilibrium (DSGE) models, which are based upon these three tenets, are at the root of both the real business cycle and the so-called ‘new Keynesian’ paradigm. In these models, it is very difficult to identify conclusions in keeping with Keynesian thought and Minsky’s analysis. The objective of this chapter is to present a model that tries to put more emphasis on endogenous forces. This assumption implies three consequences. Firstly, while the interdependence between monetary and real aspects will continue to characterize the analysis, it assumes new aspects. In fact, it depends not only on nominal rigidities in wage and price formation but also on the presence of debt and cash flows in the investment function, as stressed by Minsky (1982). The benefit of this approach is that of demonstrating a dual role for the rate of interest in both cash flows and debts. Secondly, the interrelationship between aggregate demand and supply will also be strengthened. In the present context, however, agents are assumed to be boundedly rational. They do not possess...

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