Financial Instability and Effects of Monetary Policy


Keynes and Minsky emphasize the effects of instability in the financial markets. We represent bank behavior and household portfolio preferences explicitly and investigate monetary policy effects on economic stabilization. Our model comprises dynamic equations for both the debtcapital ratio and the interest rate monetary policy. We show that the economy becomes unstable when the equity demand from households is sensitive to the debt-capital ratio. Further, we indicate that it is hard to change an unstable state into a stable state by changing monetary policy alone. We point out the need for financial regulations to make central bank policy effective.

Volume :- No.14 (2020)

Issue No :- 1 (2020)

Pages :- 117-145

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