Cycles and Crises in a Model of Debt-financed Investment-led Growth

Datta, Soumya (2012): Cycles and Crises in a Model of Debt-financed Investment-led Growth.

Abstract

The paper demonstrates possibilities of both convergence to the steady state and emergence of stable growth cycles around it in a simple macrodynamic model of debt-financed investment-led growth. The growth cycles are robust and are generated endogenously, either due to the existence of a supercritical Andronov-Hopf bifurcation, or due to the global stability condition through an application of the Poincaré-Bendixson theorem. The emergence of multiple limit cycles is also observed under certain conditions. The possibility of a deterioration of financial variables during a boom, with the resulting financial crisis providing an endogenous ceiling to a business cycle is examined in this context.

• Item Type: MPRA Paper
• Language: English
• Keywords: Growth cycles, Financial crisis, Fisher, Minsky, Andronov-Hopf bifurcation, Limit cycles.
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C62 - Existence and Stability Conditions of Equilibrium; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C69 - Other; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E12 - Keynes ; Keynesian ; Post-Keynesian; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G0 - General > G01 - Financial Crises

References

Abrahams, C. & Zhang, M. (2009), Credit Risk Assessment: the New Lending System for Borrowers, Lenders and Investors, John Wiley and Sons, Inc., Hoboken, New Jersey.

Akerlof, G. A. & Shiller, R. J. (2010), Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, Princeton University Press, Princeton, New Jersey.

Andresen, T. (1996), ‘Economic Black Holes’, Economies et Soci ́et ́es, S ́erie Monnaie et Production 30(2/3), 83–116.

Andresen, T. (1999), ‘The Dynamics of Long-range Financial Accumulation and Crisis’, Nonlinear Dynamics, Psychology and Life Sciences 3(2), 161–196. Arena, R. & Raybaut, A. (2001), On the foundations of Minsky’s business cycle theory: an interpretation, in Bellofiore & Ferri (2001).

Asada, T. (2001), Non-linear Dynamics of Debt and Capital: A Post-Keynesian Analysis, in Y. Aruka, ed., ‘Evolutionary Controversies in Economics’, Springer-Verlag, Tokyo.

Bellofiore, R. & Ferri, P., eds (2001), Financial Fragility and Investment in the Capitalist Economy, Vol. II of The Economic Legacy of Hyman Minsky, Edward Elgar Publishing Limited, Cheltenham, UK.

Catt, A. (1965), ‘“Credit Rationing” and Keynesian Model’, The Economic Journal 75(298), 358–372.

Charles, S. (2008a), ‘A Post-Keynesian Model of Accumulation with Minskyan Financial Structure’, Review of Political Economy 20(3), 319–331.

Charles, S. (2008b), ‘Corporate debt, variable retention rate and the appearance of financial fragility’, Cambridge Journal of Economics 32(5), 781–795.

Chiarella, C., Flaschel, P. & Semmler, W. (2001), The macrodynamics of debt deflation, in Bellofiore & Ferri (2001).

Datta, S. (2005), ‘Chaotic Dynamics of Financing Investment’, Metroeconomica 56(1), 58–84.

Datta, S. (2012), Robustness and Stability of Limit Cycles in a Class of Planar Dynamical Systems, working paper.

Downe, E. A. (1987), ‘Minsky’s Model of Financial Fragility: A Suggested Addition’, Journal of Post Keynesian Economics 9(3), 440–454.

Dum ́enil, G. & L ́evy, D. (1999), ‘Being Keynesian in the Short Term and Classical in the Long Term: The Traverse to Classical Long-Term Equilibrium’, Manchester School 67(6), 684–716.

Fazzari, S. M., Ferri, P. & Greenberg, E. (2001), The macroeconomics of Minsky’s investment theory, in Bellofiore & Ferri (2001), pp. 99–112.

Fazzari, S. M., Ferri, P. & Greenberg, E. (2008), ‘Cash flow, investment and Keynes-Minsky cycles’, Journal of Economic Behavior and Organization 65, 555–572.

Fisher, I. (1932), Booms and Depressions: Some First Principles, Adelphi.

Fisher, I. (1933), ‘The Debt-Deflation Theory of Great Depressions’, Econometrica 1, 337–357.

Foley, D. K. (1987), ‘Liquidity-Profit Rate Cycles in a Capitalist Economy’, Journal of Economic Behavior and Organization 8(1987), 363–376.

Foley, D. K. (2003), Financial Fragility in Developing Economies, in A. K. Dutt & J. Ros, eds, ‘Development Economics and Structuralist Macroeconomics’, Edward Elgar, Aldershot, UK, pp. 157–168.

Franke, R. & Semmler, W. (1989), Debt-Financing of Firms, Stability and Cycles in a Dynamic Macroeconomic Growth Model, in W. Semmler, ed., ‘Financial Dynamics and Business Cycles: New Perspectives’, M.E. Sharpe, Inc, Armonk, New York.

Gatti, D. D. & Gallegati, M. (2001), Financial instability revisited: aggregate fluctuations due to changing financial conditions of heterogeneous firms, in Bellofiore & Ferri (2001).

Greenwald, B. & Stiglitz, J. E. (1993), ‘Financial Market Imperfections and Business Cycles’, Quarterly Journal of Economics 108(1), 77–114.

Guilmi, C. D., Gallegati, M. & Landini, S. (2009), Financial fragility, mean-field interaction and macroeconomic dynamics: a stochastic model, in N. Salvadori, ed., ‘Institutional and Social Dynamics of Growth and Distribution’, Edward Elgar Publishing Inc., Cheltenham, UK, pp. 319–353.

Hodgman, D. R. (1960), ‘Credit risk and credit rationing’, The Quarterly Journal of Economics 74(2), 258–278.

Jaffee, D. & Russell, T. (1976), ‘Imperfect information, uncertainty and credit rationing’, Quarterly Journal of Economics 90, 651–666.

Jaffee, D. & Stiglitz, J. E. (1990), Credit Rationing, in B. Friedman & F. Hahn, eds, ‘Handbook of Monetary Economics’, Vol. II, Elsevier Science Publishers B.V., chapter 16.

Kalapodas, E. & Thomson, M. E. (2006), ‘Credit risk assessment: a challenge for financial institutions’, IMA Journal of Management Mathematics 17(1), 25–46.

Kalecki, M. (1937), ‘The Principle of Increasing Risk’, Economica pp. 440–447. Revised version titled ‘Entrepreneurial capital and investment’ in Kalecki (1971), pp 105-109.

Kalecki, M. (1971), Selected Essays on the Dynamics of Capitalist Economy, Cambridge University Press, Cambridge.

Keen, S. (1995), ‘Finance and Economic Breakdown: Modeling Minsky’s Financial Instability Hypothesis’, Journal of Post-Keynesian Economics 17(4), 607–635.

Keen, S. (1996), ‘The Chaos of Finance: The Chaotic and Marxian Foundations of Minsky’s Financial Instablity Hypothesis’, Economies et Soci ́et ́es, Monnaie et Production, S ́erie M.P. 2-3-1996(10), 55–82. Keynes, J. M. (1930), A Treatise on Money, Macmillan, London.

Kindleberger, C. P. (1978), Manias, Panics and Crashes: A History of Financial Crisis, Basic Books Inc., New York.

Kregel, J. (2008), Minsky’s Cushions of Safety Systemic Risk and the Crisis in the U.S. Subprime Mortgage Market, Economics public policy brief archive, The Levy Economics Institute.

Lagunoff, R. & Schreft, S. L. (2001), ‘A Model of Financial Fragility’, Journal of Economic Theory (99), 220–264.

Lavoie, M. (1986-87), ‘Systemic Financial Fragility: A Simplified View’, Journal of Post Keynesian Economics 9(2), 258–266.

Lima, G. T. & Meirelles, A. J. (2007), ‘Macrodynamics of debt regimes, financial instability and growth’, Cambridge Journal of Economics 31(4), 563–580.

Meirelles, A. J. & Lima, G. T. (2006), ‘Debt, financial fragility, and economic growth: A Post Keynesian macromodel’, Journal of Post Keynesian Economics 29(1), 93–115.

Minsky, H. P. (1975), John Maynard Keynes, Columbia University Press, New York.

Minsky, H. P. (1982), Inflation, Recession and Economic Policy, M.E. Sharpe Inc., New York.

Minsky, H. P. (1986), Stabilizing the Unstable Economy, Yale University Press, New Haven.

Minsky, H. P. (1994), Financial Instability Hypothesis, in P. Arestis & M. Sawyer, eds, ‘Elgar Companion to Radical Political Economy’, Edward Elgar Publishing Limited, Vermont, USA, pp. 153–158.

Palley, T. I. (1994), ‘Debt, aggregate demand, and the business cycle: an analysis in the spirit of Kaldor and Minsky’, Journal of Post Keynesian Economics 16(3), 371–390.

Reinhart, C. M. & Rogoff, K. S. (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press, Princeton, New Jersey.

Semmler, W. (1987), ‘A Macroeconomic Limit Cycle with Financial Perturbations’, Journal of Economic Behavior and Organization 8, 469–495.

Setterfield, M. (2004), ‘Financial Fragility, Effective Demand and the Business Cycle’, Review of Radical Political Economics 16(2), 207–223.

Shiller, R. J. (2008), The Subprime Solution: How Today’s Global Financial Crisis Happened, and What To Do About It, Princeton University Press, Princeton, New Jersey.

Skott, P. (1994), On the Modelling of Systemic Financial Fragility, in A. K. Dutt, ed., ‘New Directions in Analytical Political Economy’, Edward Elgar, pp. 49–76.

Skott, P. (1995), Financial Innovations, Deregulation and Minsky Cycles, in G. Epstein & H. Gintis, eds, ‘Macroeconomic Policy after the Conservative Era’, Cambridge University Press, Cambridge, Massachussets, pp. 255–273.

Stiglitz, J. E. & Weiss, A. (1981), ‘Credit Rationing in Markets with Imperfect Information’, American Economic Review 71(3), 393–410.

Stiglitz, J. E. & Weiss, A. (1983), ‘Incentive effects of terminations: Applications to the credit and labor markets’, American Economic Review 73, 912–927.

Stiglitz, J. E. & Weiss, A. (1992), ‘Asymmetric Information in Credit Markets and its implications for Macroeconomics’, Oxford Economic Papers 44(4), 694–724.

Taylor, L. & O’Connell, S. A. (1985), ‘A Minsky Crisis’, Quarterly Journal of Economics 100 Supplement, 871–885.

Taylor, L. & von Arnim, C. R. (2008), Debt-equity Cycles in the Twentieth Century: Empirical Evidence and a Dynamic Keynesian Model, in P. Flaschel & M. Landesmann, eds, ‘Mathematical Economics and the Dynamics of Capitalism: Goodwin’s Legacy Continued’, Routledge, London, pp. 145–162.

Vercelli, A. (2000), ‘Structural Financial Instability and Cyclical Fluctuations’, Structural Change and Economic Dynamics 11, 139–156.