ABSTRACT OF PAPER
Title: Liquidity risk, money market and monetary policy in Minsky's theory
Author: Diatkine Sylvie
Liquidity risk, money market and monetary policy in Minsky’s theory Sylvie Diatkine (Université Paris Est et PHARE, Université Paris 1) 19 th Annual ESHET Conference, Rome (14-16 May 2015) Abstract We want to underline Minsky’s original contribution to the analysis of liquidity risk which plays an important part in his theory of investment. It is related to the introduction of institutions, more particularly of banks, into economic analysis, which necessitates, according to Minsky, an important departure from orthodox analysis, but also from “traditional” Keynesianism. In this contribution, we mostly refer to Minsky’s early writings (1957, 1967), where he studies the historical evolution of banks refinancing in the Unites States and describes the consequences. Minsky stresses “refinance risk” for different agents which is, for him, the basis of the liquidity risk and which has less been studied by commentators. He then introduces the changing conditions of refinancing on the money market. Minsky shows that the latter as a market for banks liquidity is central for the impact of monetary policy. He thus opens the “black box” of the way monetary policy is transmitted to the economy through the short term rate of interest. We discuss whether he is renewing with the “classical tradition” of central banking and lender in last resort. In a first part, we precise how refinance risk is a measure of the liquidity risk and a key determinant of investment by firms and of positions by banks. In a second part, we explain the central role of the money market in Minsky. He stresses the evolution of the asset structure of banks and of refinancing methods by the central bank in the United States which generate innovations that are new ways to obtain liquidity and a development of a “speculative finance”. These new conditions on the money market would counteract monetary policy. In a third part, we present Minsky’s relation between velocity of circulation of money and the rate of interest as a step function, integrating the effect of changes in institutions. This relation permits to explain that a restrictive monetary policy could be ineffective and may contribute to a liquidity crisis, thus showing the necessity for the central bank to connect its function as a lender in last resort to the one of control of inflation and modify its instruments with the aim to obtain a “good financial system”.
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