Profits, confidence, and public deficits: modeling Minsky's institutional dynamics

In this paper, we present a Minskyan model that deals explicitly with the influence of the institutional dynamics on the relation between finance, investment, and economic fluctuations. We show that stabilization policy can be efficient in certain cases--namely, when fiscal policy is sensitive enough to variations in private investment. In contrast, the economy is unstable when the deficit constraint is not flexible enough. These results, which echo recent debates and proposals on budget deficit rules in the Economic and Monetary Union, are fully consistent with the way Minsky considered that public authorities should "stabilize an unstable economy."