Please use this identifier to cite or link to this item: http://hdl.handle.net/2381/11079
Title: Circuit Theory Extended: The Role of Speculation in Crises
Authors: Lancastle, Neil
First Published: 28-Aug-2012
Publisher: Economics
Citation: Economics: The Open-Access, Open-Assessment E-Journal, 2012, 6, 34
Abstract: This paper asks why modern finance theory and the efficient market hypothesis have failed to explain long-term carry trades; persistent asset bubbles or zero lower bounds; and financial crises. It extends Godley and Lavoie (Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth, 2007) and the Theory of the Monetary Circuit to give a mathematical representation of Minsky’s Financial Instability Hypothesis. In the extended circuit, the central bank rate is not neutral and the path is non-ergodic. The extended circuit has survival constraints that include a living wage, a zero interest rate and an upper interest rate. Inflation is everywhere. The possibility of stable carry trades emerges. In high interest rate, hedge economies, powerful banks invest surplus loan interest. With speculation, banks lobby to enter investment markets and the system is precariously liquid/illiquid. In a Ponzi economy, where loans never get repaid, solvency is a balance between increasing reserves, reducing interest rates and rebuilding banks’ balance sheets during systemic crises. Simulating bank bailouts, household bailouts and a Keynesian boost suggests that bank bailouts are the least effective intervention, exerting downward pressure on wages and household spending: austerity.
DOI Link: 10.5018/economics-ejournal.ja.2012-34
ISSN: 1864-6042
Links: http://www.economics-ejournal.org/economics/journalarticles/2012-34
http://hdl.handle.net/2381/11079
Version: Publisher Version
Status: Peer-reviewed
Type: Journal Article
Rights: © 2012 The authors. This is an Open Access article distributed under the terms of the Creative Commons Attribution Non-commercial License http://creativecommons.org/licenses/by/2.0).
Appears in Collections:Published Articles, School of Management

Files in This Item:
File Description SizeFormat 
economics_2012-34.pdf1.03 MBAdobe PDFView/Open


Items in LRA are protected by copyright, with all rights reserved, unless otherwise indicated.