Debt and investment in the Keen model: a reappraisal of modelling Minsky

Abstract

We examine to what extent the Keen model (Keen 1995) is a faithful modelling of Minsky's financial instability hypothesis. We focus on debt, money, and debt-induced crisis. We propose a clear interpretation of the debt: households lend unconsumed income to firms to finance their investments, and money creation is not necessary. We offer a detailed description of the economic collapse and analyse its causes thanks to numerical experiments. The crisis is triggered by profits squeezed by wages and not by debt overhang. We test alternative assumptions on the investors' behaviour to show that behaviour at very low profits is fundamental. We conclude that the Keen crisis has few Minskyan flavours.

The Broad Consequences of Narrow Banking

“…. , 4 and ξ can be found in Pottier and Nguyen-Huu (2017). The remaining parameters, namely the interest rates r, r D , r θ and r m , the capital adequacy ratio k r , and the constants g and t related to government spending and taxation are used for illustration only and are based on recent representative values in advanced economies.…”