Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/103164
Authors: 
Greenwood-Nimmo, Matthew
Tarassow, Artur
Year of Publication: 
2013
Series/Report no.: 
DEP (Socioeconomics) Discussion Papers, Macroeconomics and Finance Series 6/2013
Abstract: 
The Financial Instability Hypothesis associated with Hyman Minsky has profound implications for the conduct of monetary policy in modern capitalist economies. At its core is the proposition that the central bank may contribute to the financial fragility of leveraged firms in its pursuit of inflation-targeting interest rate policies. This paper develops a small macroeconomic model incorporating many of the salient features of a Minskyan economy. The imposition of the resulting theoretical restrictions in a CVAR model provides support for Minsky’s main proposition that interest rate innovations can drive a wedge between the cash-inflows of firms and their debt-servicing obligations. The paper concludes that the implementation of countercyclical capital requirements can provide monetary policymakers with additional policy instruments that can be used to cool overheated sectors without recourse to the ‘blunt instrument’ of interest rate policy.
Subjects: 
Monetary Policy
Inflation Targeting
Financial Instability Hypothesis
Cointegrating VAR
Asset Price Cycles
JEL: 
C32
C51
E32
E52
Document Type: 
Working Paper

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