Debt, boom, bust: a theory of Minsky-Veblen cycles
TL;DR: In this article, the authors interpret the economic development leading to the recent crisis as a series of events within a Minsky-Veblen cycle and introduce conspicuous consumption concerns, as described by Veblen, into a stock-flow-consistent post Keynesian model and demonstrate that a decrease in income equality leads to a corresponding increase in debt-financed consumption demand.
Abstract: This article reflects on the economic development leading to the recent crisis and interprets this development as a series of events within a Minsky-Veblen cycle. To illustrate this claim we introduce conspicuous consumption concerns, as described by Veblen, into a stock-flow-consistent post Keynesian model and demonstrate that, under these conditions, a decrease in income equality leads to a corresponding increase in debt-financed consumption demand. Here Minskian dynamics come into play: if perceived economic stability causes banks' margins of safety to decrease sufficiently, increased credit demand is accommodated by credit supply giving rise to a debt-financed consumption boom. As the solvency of households decreases and interest rates move up, banks reduce lending, triggering household bankruptcies and, finally, a recession. What follows is a stable period of consolidation, where past debts are repaid, financial stability is regained and conspicuous consumption motives may gradually take over again. ...
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Journal Article•
410 citations
01 Jan 2016
TL;DR: Raghuram G. Rajan, a professor at the University of Chicago and former chief economist at the International Monetary Fund, proves the exception to Greenberg's rule of unsatisfactory endings.
Abstract: Maybe Greenberg hadn’t come across Fault Lines: How Hidden Fractures Still Threaten the World Economy. Raghuram G. Rajan, a professor at the University of Chicago and former chief economist at the International Monetary Fund, proves the exception to Greenberg’s rule of unsatisfactory endings. Where others have delved into the personalities and perverse systems that led to the financial crisis and then summed up with a halfbaked list of policy ideas, Rajan puts a premium on policy. In fact, nearly half of Fault Lines is dedicated to policy choices that Rajan believes are not only realistically achievable but likely to be quite effective. He makes a good case.
386 citations
Posted Content•
TL;DR: In this article, the authors developed a model that augments the simple neoclassical framework by introducing relative income concerns into women's (or families') utility functions and found that women's decisions to seek paid employment depend on the employment decisions of other women with whom relative income comparisons might be important.
Abstract: We ask whether women's decisions to be in the labor force may be affected by the decisions of other women in ways not captured by standard models. We develop a model that augments the simple neoclassical framework by introducing relative income concerns into women's (or families') utility functions. In this model, the entry of some women into paid employment can spur the entry of other women, independently of wage and income effects. This mechanism may help to explain why, over some periods, women's employment appeared to rise faster than could be accounted for by the simple neoclassical model. We test the model by asking whether women's decisions to seek paid employment depend on the employment decisions of other women with whom relative income comparisons might be important. In particular, we look at the effects of sisters' employment on women's own employment. We find strong evidence that women's employment decisions are positively related to their sisters' employment decisions. We also take account of the possibility that this positive relationship arises from heterogeneity across families in unobserved variables affecting the employment decision. We conduct numerous empirical analyses to reduce or eliminate this heterogeneity bias. We also look at the relationship between husbands' relative income and wives' employment decisions. In our view, the evidence is largely supportive of the relative income hypothesis.
326 citations
TL;DR: The authors argue that higher inequality and the associated demand drag helps explain the slow recovery in the US personal income distribution, and argue that the consumption-income ratio for the bottom 95 percent did finally decline, consistent with tighter borrowing constraints, while the top 5 percent ratio rose.
Abstract: Rising inequality reduced income growth for the bottom 95 percent of the US personal income distribution beginning about 1980 To maintain stable debt to income, this group’s consumption-income ratio needed to decline, which did not happen through 2006, and its debt-income ratio rose dramatically, unlike the ratio for the top 5 percent In the Great Recession, the consumption-income ratio for the bottom 95 percent did finally decline, consistent with tighter borrowing constraints, while the top 5 percent ratio rose, consistent with consumption smoothing We argue that higher inequality and the associated demand drag helps explain the slow recovery
173 citations
Cites background from "Debt, boom, bust: a theory of Minsk..."
...Similar implications follow from the theoretical models in Kapeller and Schütz (2012) and Setterfield and Kim (2013). bottom 95 percent balance sheets prevented any kind of consumption smoothing....
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TL;DR: The authors investigated the effects of changes in the distribution of income and in wealth on aggregate demand and its components, and found that the average demand regime is wage-led, while the effect of personal income inequality and asset prices and debt was found to be strong.
Abstract: The paper investigates the effects of changes in the distribution of income and in wealth on aggregate demand and its components. We extend the Bhaduri and Marglin (1990) model to include personal income inequality as well as asset prices and debt. This allows for an evaluation of the wage or profit-led nature of demand regimes, of the expenditure cascade argument (Frank et al. 2010) and several hypotheses regarding the effects of wealth and debt. Our estimates are based on a panel of 18 OECD countries covering the period 1980-2013. For the full panel the average demand regime is found to be wage led. We fail to find effects of personal inequality, but do find strong effects of debt and property prices which have been the major drivers of aggregate demand in the decade prior to the 2007 crisis.
108 citations
References
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Book•
01 Jan 1936
TL;DR: In this article, a general theory of the rate of interest was proposed, and the subjective and objective factors of the propensity to consume and the multiplier were considered, as well as the psychological and business incentives to invest.
Abstract: Part I. Introduction: 1. The general theory 2. The postulates of the classical economics 3. The principle of effective demand Part II. Definitions and Ideas: 4. The choice of units 5. Expectation as determining output and employment 6. The definition of income, saving and investment 7. The meaning of saving and investment further considered Part III. The Propensity to Consume: 8. The propensity to consume - i. The objective factors 9. The propensity to consume - ii. The subjective factors 10. The marginal propensity to consume and the multiplier Part IV. The Inducement to Invest: 11. The marginal efficiency of capital 12. The state of long-term expectation 13. The general theory of the rate of interest 14. The classical theory of the rate of interest 15. The psychological and business incentives to liquidity 16. Sundry observations on the nature of capital 17. The essential properties of interest and money 18. The general theory of employment re-stated Part V. Money-wages and Prices: 19. Changes in money-wages 20. The employment function 21. The theory of prices Part VI. Short Notes Suggested by the General Theory: 22. Notes on the trade cycle 23. Notes on mercantilism, the usury laws, stamped money and theories of under-consumption 24. Concluding notes on the social philosophy towards which the general theory might lead.
15,146 citations
13,200 citations
Book•
01 Jan 1899
TL;DR: The Pecuniary standard of living is defined in this paper as "conspicuous leisure, conspicuous consumption, and higher learning as an expression of the pecuniary culture".
Abstract: Introductory Pecuniary Emulation Conspicuous Leisure Conspicuous Consumption The Pecuniary Standard of Living Pecuniary Canons of Taste Dress as an Expression of the Pecuniary Culture Industrial Exemption and Conservatism The Conservation of Archaic Traits Modern Survivals of Prowess The Belief in Luck Devout Observances Survivals of the Non-Invidious Interest The Higher Learning as an Expression of the Pecuniary Culture
5,259 citations
TL;DR: Kahneman as mentioned in this paper made a statement based on worked out together with Shane Federik the quirkiness of human judgment, which was later used in his speech at the Nobel Prize in economics.
Abstract: Daniel Kahneman received the Nobel Prize in economics sciences in 2002, December 8, Stockholm, Sweden. This article is the edited version of his Nobel Prize lecture. The author comes back to the problems he has studied with the late Amos Tversky and to debates conducting for several decades already. The statement is based on worked out together with Shane Federik the quirkiness of human judgment. Language: ru
4,462 citations
"Debt, boom, bust: a theory of Minsk..." refers background in this paper
...…family members)—the people with whom we share (parts of) our social identity (hogg and terry, 2000). these people serve as reference standards, as “prototypes” (Kahnemann, 2003), so to speak, insofar as they influence the consumption aspirations of their associates (cf. cynamon and Fazzari, 2008)....
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...these people serve as reference standards, as “prototypes” (Kahnemann, 2003), so to speak, insofar as they influence the consumption aspirations of their associates (cf....
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Journal Article•
TL;DR: The Pecuniary standard of living is defined in this paper as "conspicuous leisure, conspicuous consumption, and higher learning as an expression of the pecuniary culture".
Abstract: Introductory Pecuniary Emulation Conspicuous Leisure Conspicuous Consumption The Pecuniary Standard of Living Pecuniary Canons of Taste Dress as an Expression of the Pecuniary Culture Industrial Exemption and Conservatism The Conservation of Archaic Traits Modern Survivals of Prowess The Belief in Luck Devout Observances Survivals of the Non-Invidious Interest The Higher Learning as an Expression of the Pecuniary Culture
4,216 citations