Debt, boom, bust: a theory of Minsky-Veblen cycles

TLDR: 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. ...