Journal Article

Bank profitability, leverage and financial instability: a Minsky–Harrod model

Soon Ryoo

in Cambridge Journal of Economics

Published on behalf of Cambridge Political Economy Society

Volume 37, issue 5, pages 1127-1160
Published in print September 2013 | ISSN: 0309-166X
Published online March 2013 | e-ISSN: 1464-3545 | DOI: http://dx.doi.org/10.1093/cje/bes078
Bank profitability, leverage and financial instability: a Minsky–Harrod model

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  • General Aggregative Models
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This paper develops a stock-flow-consistent macroeconomic model where bank profitability and bank leverage play a crucial role in the determination of firms’ liability structure. The model assumes that banks’ credit supply depends on bank profitability as well as firms’ profit–interest ratio. Our analysis suggests that a strong expansionary effect of bank profitability on credit supply tends to destabilise the economy, leading to cycles driven by the interactions between firms’ and banks’ financial behaviour. The formal framework is used to discuss Hyman Minsky’s proposal in his Stabilizing an Unstable Economy for the control over the permissible leverage ratios and payout ratios of banks.

Keywords: Bank leverage; Rate of return on bank capital; Financial instability; Stock-flow consistency; E12; E32; E44

Journal Article.  10667 words.  Illustrated.

Subjects: General Aggregative Models ; Prices, Business Fluctuations, and Cycles ; Money and Interest Rates

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