Minsky’s Theory of Inflation and its Theoretical and Empirical Relevance to Credit-Driven Economies

Abstract

This article examines Minsky’s theory of inflation, as distinct from a monetary theory of inflation and a productivity-adjusted wage theory of inflation. Minsky’s view on money and banking will be elucidated in contrast to orthodox banking theories, drawing a causal relation from bank credit creation to aggregate demand, profits, and inflation. This article claims that his theory is particularly relevant to modern economies in which the globalization of the production process and the decline in the power of unions have mitigated wage-led inflation while financialization has amplified the business cycle and the movement in inflation over the previous forty years. In other words, excessive bank lending has underpinned aggregate spending, which created too much “claim” on consumer goods, thus precipitating profit-led inflation. By contrast, an unavoidable financial crisis and attempts, especially by households to pay off outstanding debt, dampened aggregate demand, thus causing a slowdown in profits and inflation.

Keywords:

• Minsky
• inflation
• household credit
• profit

JEL Classification Codes:

• C22
• E12
• E31

Notes

1 See Appendix B in Minsky’s book ([1986] 2008) for the skeletal price equation for more details.

2 Hyman P. Minsky ([1986] 2008) defines profits as “the difference between sales revenues and technologically determined costs.” It means that wages of nonproductive (technologically irrelevant or ancillary/overhead) workers (even in consumption-good industries) are considered as profits. It implies that a higher proportion of nonproduction workers to total employment will lead to a higher markup due to higher demand from those incomes and higher expenses related to ancillary activities (i.e., research, development, sales, marketing, and finance), putting upward pressure on prices.

3 There are a few post-Keynesians who emphasize the demand-pull inflation: Wray (2001 and 2003), Tymoigne (2009), and Kim (2020).

4 Thomas Palley (1996) argues that “if some sectors were at full employment, then the increase in aggregate nominal demand would cause prices to rise in these sectors … Moreover, the greater the proportion of sectors at full employment, the steeper the slope of the price-output locus. Finally, if all sectors were at full employment, the increase in aggregate nominal demand would cause prices in all sectors to rise” (170). It thereby allows for demand-pull inflation below economy-wide full employment from the post-Keynesian perspective although he recognized that inflation is fundamentally cost-push phenomena.

5 In the next section, the fragility and evolution of the financial structure and its impact on the macroeconomy will be discussed.

6 The money-inflation link lacks empirical evidence as found in De Grauwe and Polan (2005) and Gertler and Hofmann (2018). Such discrepancy is especially apparent in developed economies characterized by low inflation and a highly financialized system. It is beyond the scope of this article to thoroughly critique the narrow interpretation of the quantity theory of money, but a missing element in the money-inflation link (or a declining income velocity) is money created for non-GDP transactions such as speculative and financial assets (Mariscal and Howells 2012; Werner 2012).

7 It also implies that inflation will not necessarily follow if bank lending is not directed toward real economy or if an increase in demand is offset by an increase in the available quantity of goods and services.

8 Hedge financing is a position in which an economic unit’s expected cash flow always exceeds its loan and operating expenses. Speculative financing is a position in which an economic unit’s expected cash flow will not be sufficient to meet the principle on loan but its interest payment. In this case, the loan must be rolled over. Last, Ponzi financing is a position in which an economic unit’s expected cash flows cannot even pay the interest due. In this case, more loan has to be drawn or an asset has to be sold just to meet its current cash flow commitments.

9 One of the reasons for the falling share of investment is that corporations are financialized in a way that they, with their profits and even taking on debt, purchase financial assets, especially their own shares, to bolster their share price, hence catering to the interests of shareholders including CEOs of the companies at the expense of real productive investment (Stockhammer 2004; Milber and Winkler 2010; Lazonick 2014).

10 Many economists clearly acknowledge the impact of household credit on consumption, output, financial fragility, and inequality, but little research has investigated its effect on inflation. The exception is Hongkil Kim (2019).

Additional information

Notes on contributors

Hongkil Kim

Hongkil Kim is in the Department of Economics, University of North Carolina at Asheville.