Follow the link for the full summary:

https://markusacademy.substack.com/p/taming-a-minsky-cycle

Link to sign up for the webinar series:

https://markusacademy.substack.com/

On March 11, 2021, Ivan Werning joined Markus’ Academy for a talk on his recent work with Emmanuel Farhi. Werning is the Robert M. Solow Professor of Economics at MIT.

Download the slides here.

Highlights:

• The paper examines a Minsky cycle starting with a boom with rising asset prices and leverage followed by a Minsky moment where asset prices fall, hurting the real economy. 
• Motivation for macroprudential policies include financial fragility, aggregate demand stabilization, and monetary policy constraints. 
• Targets include the macroeconomic goal of the current recession and financial stability goal. There is a tradeoff between these goals and the instruments available.
• The level of debt from time 0 to 1 is going to negatively impact asset price at time 1 and there is a one-to-one relationship between that asset price and output. 
• Absent macroprudential tools, monetary policy should lean against the economy at time 0 in order to reduce the bust at time 1. If macroprudential tools are available, one should use them to limit leverage at time 0 in a world with rational expectations.