Inflation and Speculation in a Dynamic Macroeconomic Model

Abstract

We study a monetary version of the Keen model by merging two alternative extensions, namely the addition of a dynamic price level and the introduction of speculation. We recall and study old and new equilibria, together with their local stability analysis. This includes a state of recession associated with a deflationary regime and characterized by falling employment but constant wage shares, with or without an accompanying debt crisis. We also emphasize some new qualitative behavior of the extended model, in particular its ability to produce and describe repeated financial crises as a natural pace of the economy, and its suitability to describe the relationship between economic growth and financial activities.

The Broad Consequences of Narrow Banking

“…The system (2.61) is very similar to the system analyzed in Section 4 of Grasselli and Nguyen Huu (2015) if one sets the speculative flow F = 0 in their equation (46). We therefore do not repeat the analysis of the equilibrium points of (2.61), except for observing that it admits an interior equilibrium characterized by a profit share defined as π = κ −1 (ν(α + β + δ)) (2.72) and corresponding to non-vanishing wage share and employment rate, finite private debt, and a real growth rate of κ(π) = α + β.…”

“…To solve (2.61), it is necessary to specify the behavioural functions Φ(·) and κ(·). For the Philips curve we follow Grasselli and Nguyen Huu (2015) and choose…”

On the normality of negative interest rates

“…A detailed analysis of the original model without the government sector can be found in [15]. Because we are interested in nominal rather than real interest rates, we consider the version of the Keen model with inflation introduced in [17]. For the extended model, we consider a consolidated public sector conducting both fiscal and monetary polices.…”

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

“…The Keen model has thus gained considerable attention, inside and outside academia. Researchers have devoted much time to elucidating its mathematical properties or adding specific extensions (Grasselli and Costa-Lima 2012;Costa-Lima et al 2014;Grasselli and Nguyen-Huu 2015). The considerable amount of theoretical work related to this model and the more frequent references to it make it necessary to investigate its economic content more deeply.…”

“…This sets the model in a stock-flow consistent framework (Grasselli and Nguyen-Huu 2015). Accordingly, the law-of-motion of the debt-to-output ratio d ¼ D=Y,…”