Publications

Using Minsky (1986), this paper attempts to answer two questions: (1) How does policy affect real and nominal variables? and (2) How should monetary policy be conducted so as to improve the performance of the economy? Minsky asserted that rising interest rates, brought about by contractionary monetary policy, compromised the balance sheets of firms that had financed long-term positions in illiquid assets with short-term borrowing. As interest rates rose, the debt service costs of a project increased relative to the present discounted value of its future revenue streams. This approach accounts for the effects of interest rate policy on the economy, answering the first question. A model based on Minsky's theory confirms the plausibility of his theory. The model also shows that anti-inflationary policy destabilizes the economy and is therefore counterproductive, providing a partial answer to the second question. A vector autoregression analysis suggests that post-War US data are consistent with Minsky's theory.