The emergence of co‐existing debt cycle regimes in an economic growth model

Abstract

This paper aims to provide a modeling framework that keeps track of the interdependency between firms’ external financing structure and the state of the economy. Accordingly, it is based on the well‐known Kaleckian model which is combined with a modeling strategy of a sentiment index that was proposed by Franke (2012, 2014). The sentiment influences firms’ subjective sales expectations and thus their planned level of investment. As it turns out, the non‐linear model set‐up appears to be flexible in the sense that it is able to generate different interesting dynamic scenarios. It is shown that it may produce (a) sentiment‐driven business cycle fluctuations, including endogenously determined Minsky‐Koo‐kind recessions, and, more interestingly, (b) two distinct economic environments that exist contemporaneously: a ‘low‐’ and ‘high‐indebted’ regime.

Minsky from the Bottom Up - Formalising the Two-Price Model of Investment in a Simple Agent-based Framework

“…the absence of an explicitly modelled banking sector). In contrast to papers such as Nikolaidi (2014) , Lojak (2018) or Jump et al (2017) , the cycles shown here are not driven by evolving leverage targets (indeed firms in the present model have no explicit targets whatsoever regarding their financial ratios) or switching behaviour in sentiment or financing strategies of firms (although the computational experiments presented below do explore sentiment dynamics and strategy switching behaviour). In many Minsky models (e.g.…”

“…Without going too deeply into the debate, the results of the present model can be related to a long-standing point of contention in the Minskyan literature, namely that raised by Lavoie and Seccareccia (2001) . They argue that Minsky's FIH contains a fallacy of composition in that, due to the Kaleckian profit equation, increases in aggregate investment involving collective attempts by firms to increase their leverage may lead to a decline in the aggregate leverage ratio (see also Lavoie, 1995 ), a phenomenon termed the 'paradox of debt' ( Lavoie, 2014 , Ch.…”

“…(10) , I instead allow them to take either an optimistic or pessimistic attitude and adjust their investment strategy accordingly. This approach is similar to that taken by Lojak (2018) , who introduces a sentiment variable directly affecting sales expectations and hence investment into an aggregate Kalecki-Minsky model, finding that the non-linearity incorporated into the sentiment dynamics itself can give rise to cycles. 24 In the present experiment, a 'sentiment' variable for each firm is calculated as…”

Minsky’s financial instability hypothesis

“…Minskyan models have assumed that the interest rate is a positive function of the leverage ratio of firms (e.g. Keen, 1995;Asada, 2001;Charles, 2008a;Lojak, 2018;Giri et al, 2019;Reissl, 2020), of economic activity (e.g. Lima and Meirelles, 2007;Fazzari et al, 2008) or of the financial position of both the lenders and the borrowers (Delli Gatti et al, 2010).…”

Investment behaviour and “bull & bear” dynamics: modelling real and stock market interactions

“…In fact, there exists a vast literature on the crucial role of credit as a factor leading both to the instability of the system and to a strengthening of real-…nancial linkages in the economy. This tradition a la Minsky has recently incorporated di¤erent levels of behaviour heterogeneity, enlightening di¤erent aspects of the interdependency between …rm's external …nancial structure and the state of the economy (see, for example, Lojak, 2018).…”