The paradox of debt and Minsky cycle: Nonlinear effects of debt and capital and variety of capitalism

Abstract

To study the variety of financialized capitalism contingent on firms’ institutional behavior, we model the US type of shareholder-oriented capitalism with the Minskyan cycle and the Japanese type of partially fledged financialized capitalism with high firm retention rates using the paradox of debt (Steindl) cycle. The results show: 1) instability could arise when firms have a high retention rate of profit to deleverage; 2) the debt-led and the debt-burdened demand regimes can be distinguished by setting sufficiently low retention rates for the former and that of high rates for the latter; 3) the level of retention rate is important in determining the short-run condition but also sets the condition of the long-run Minsky or Steindl debt cycle while we observe secular stagnation in the accumulation rate; 4) the debt-burdened demand transforms into a long-wave cyclical growth with sufficiently high firms' animal spirits, which exhibits the possibility of demand-led cyclical growth.