Macrodynamics of debt regimes, financial instability and growth

Abstract

This paper develops a post-Keynesian dynamic model of capacity utilisation and growth, in which the supply of credit-money is endogenous and firms' debt position—and thus the financial fragility of the economy à la Hyman Minsky—is explicitly modelled. The interest rate is set by banks as a markup over a base rate exogenously determined by the monetary authority. The banking markup varies with changes in capacity utilisation, while the debt ratio varies with changes in the rates of interest, capital accumulation and growth. Regarding dynamics, it is shown the possibility of relating the stability properties of a system with the interest rate and the debt ratio as state variables to the prevailing Minskyan regime—hedge, speculative or Ponzi.