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Overconsumption, cbkp_redit rationing and bailout monetary policy: A minskyan perspective

Abstract:

We consider a Keynes-Goodwin model of effective demand and the distributive cycle where workers purchase goods and houses with a marginal propensity significantly larger than one. They therefore need cbkp_redit, supplied from asset holders, and have to pay interest on their outstanding debt. In this initial situation, the steady state is attracting, while a marginal propensity closer to one makes it repelling. The stable excessive overconsumption case can easily turn from a stable boom to explosiveness and from there through induced processes of cbkp_redit rationing into a devastating bust. In such a situation the central bank may prevent the worst by acting as cbkp_reditor of last resort, purchasing loans where otherwise debt default (and bankruptcy regarding house ownership) would occur. This bail-out policy can stabilize the economy and also reduces the loss of homes of worker families.