The Missing Macro Link

Abstract

This paper addresses the critique of the aggregational problem attached to the financial instability hypothesis of Hyman Minsky. The core of this critique is based on the Kaleckian analytical framework and, in very broad terms, states that the expenditure of i¬rms for investment is at the same time a source of income for the i¬rms producing capital goods. Hence, even if investments are debt i¬nanced, as in Minsky's analysis, the overall level of indebtedness of the i¬rm sector remains unchanged, since the debts of investing i¬rms are balanced by the income of capital goods-producing i¬rms. According to the critics, Minsky incurs a fallacy of composition when he does not take this dynamic into account when applying his micro analysis of investment at the macro level. The aim of this paper is to clarify the consequences of debt-i¬nanced investments over the i¬nancial structure of an aggregate economy. Starting from the works of Michal Kalecki and Josef Steindl, we developed a stock-flow consistent analysis of a highly simplii¬ed economy under four different i¬nancial regimes: (1) debt-i¬nanced with no distributed profits, (2) debt-i¬nanced with distributed proi¬ts, (3) internally i¬nanced with no distributed proi¬ts, and (4) internally i¬nanced with distributed proi¬ts. The results of our investigation show that debt-i¬nanced investments do not lead to a worsening of the i¬nancial position of the i¬rm sector only if specific assumptions are taken into account.