Rediscovering Fiscal Policy Through Minskyan Eyes

Recent developments in macroeconomic policy, both in terms of theory and practice, have elevated monetary policy while fiscal policy has been downgraded. The latter is rarely mentioned in policy discussion, apart from arguing to place limits on budget deficits and fiscal variables. This paper presents the opposite view of Hyman P. Minsky. Rejecting the orthodox assumptions of unbounded individual and collective rationality, Minsky places uncertainty and financial instability at the centre of his analysis. The limits of individual and collective rationality feed each other, generating deviation-amplifying mechanisms that make the economy unstable. The last one thus assumes a cyclical behaviour that drives it from the torrid summers of speculative booms to the gloomy winters of financial crises, debt deflations and deep depressions. Even if Minsky is generally considered as one of the main interpreters of Keynes, according to this work his economics is very different from Keynes’s one in terms both of business cycles and of growth. In comparison with the Keynesian tradition, according to Minsky fiscal policy is even more important and effective. Government intervention is not only necessary to reach and maintain full employment; it is also indispensable to contain capitalism’s instability and to avoid the disaster. The effect of fiscal policy is not only to underpin and stabilize aggregate demand, income and employment. It has also the task to protect the robustness of the financial system by stabilizing profits and by issuing government bonds. The opening up of the economy may increase its fragility, making fiscal policy even more important. The unprecedented growth of the domestic and international financial transactions, as well as the recent financial turmoil, confirm the validity of Minsky’s insights and make his views on fiscal policy even more noteworthy and fruitful.