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

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 13: Towards a Stochastic Switching

Piero Ferri


A STOCHASTIC VERSION In a strictly neo-classical world where there is a clear-cut separation between real and monetary aspects and the Modigliani–Miller theorem holds, it is not very productive to study the impact of financial events on the dynamics of economic fluctuations. In order to understand these interactions, it is important to refer to other paradigms where these relationships are not only allowed but are at the core of the analysis. In this perspective, Minsky’s contribution becomes essential, as has also been claimed in other parts of the book. The objective of the present chapter is to insert the Minskian triad, based upon the distinction between hedgers, speculators and Ponzi agents, into a macroeconomic context where there is a sharp contrast between solvent regimes and crisis equilibria. To develop these ideas (see also Ferri, 2010 and Ferri and Variato 2010c), a dynamic model is presented with four main characteristics, which partially differ from the properties of the models discussed so far. Firstly, the threshold is based upon financial considerations, where it is useful to separate solvent agents from those who are not. Secondly, as suggested by Minsky himself, the threshold is considered within a stochastic environment so that the separation between the two regimes is more complex. Thirdly, we reconsider the behavior of leveraged firms, dropping the hypothesis of a leveraged consumer. Finally, monetary policies are assumed to switch in a more radical way with respect to previous examples. The model presented in the current chapter maintains two characteristics...

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