A Strategy Switching Approach to Minskyan Business Cycles

Rob Jump and Jo Michell

This paper presents a simple model of Minsky’s business cycle theory. The modelis based on a flexible accelerator framework where firms play strategies defined by atarget debt to income ratio. Via a strategy switching mechanism, fluctuations with low perceived volatility lead to firms reducing their margins of safety by moving towards higher debt to income ratios. This increases volatility, the economy is destabilised, and firms increase their margins of safety by moving towards lower debt to income ratios.

This cycle repeats itself, capturing Minsky’s “stability is destabilising” insight. We demonstrate the existence of a Hopf bifurcation and a corridor of stability analytically, and the existence of homoclinic and heteroclinic bifurcations numerically. We also demonstrate the existence of chaotic dynamics characterised by sustained periods of stagnation punctuated by periods of pronounced volatility.

 

 

All welcome, no need to book.