Minsky's acceleration channel and the role of money

Abstract

Hyman Minsky suggested a possible channel through which monetary policy could affect the economy. He asserted that rising interest rates due to 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. A model based on Minsky's theory confirms its plausibility. The model also shows that anti-inflationary policy potentially destabilizes if used too aggressively. A vector autoregression analysis suggests that postwar U.S. data are consistent with Minsky's theory.

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