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dc.contributor.authorLancastle, Neilen
dc.date.accessioned2016-03-17T15:32:02Z
dc.date.available2016-03-17T15:32:02Z
dc.date.issued2012-08-28
dc.identifier.citationLancastle, N. (2012) Circuit Theory Extended: The Role of Speculation in Crises. Economics: The Open-Access, Open-Assessment E-Journal, 6, 2012-34en
dc.identifier.urihttp://hdl.handle.net/2086/11640
dc.description.abstractThis paper asks why modern finance theory and the efficient market hypothesis have failed to explain long-term carry trades; persistent asset bubbles or zero lower bounds; and financial crises. It extends Godley and Lavoie (Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth, 2007) and the Theory of the Monetary Circuit to give a mathematical representation of Minsky’s Financial Instability Hypothesis. In the extended circuit, the central bank rate is not neutral and the path is nonergodic. The extended circuit has survival constraints that include a living wage, a zero interest rate and an upper interest rate. Inflation is everywhere. The possibility of stable carry trades emerges. In high interest rate, hedge economies, powerful banks invest surplus loan interest. With speculation, banks lobby to enter investment markets and the system is precariously liquid/illiquid. In a Ponzi economy, where loans never get repaid, solvency is a balance between increasing reserves, reducing interest rates and rebuilding banks’ balance sheets during systemic crises. Simulating bank bailouts, household bailouts and a Keynesian boost suggests that bank bailouts are the least effective intervention, exerting downward pressure on wages and household spending: austerity.en
dc.language.isoenen
dc.publisherEconomics eJournalen
dc.subjectCircuit theoryen
dc.subjectmacroeconomic simulationen
dc.subjectcarry tradeen
dc.subjectausterityen
dc.subjectbanking regulationen
dc.subjectinterest rate policyen
dc.titleCircuit Theory Extended: The Role of Speculation in Crisesen
dc.typeArticleen
dc.identifier.doihttp://dx.doi.org/10.5018/economics-ejournal.ja.2012-34
dc.peerreviewedYesen
dc.funderN/Aen
dc.projectidN/Aen
dc.researchinstituteFinance and Banking Research Group (FiBRe)en


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