FINANCIAL CRISES AND THE ROLE OF ECONOMIC POLICY: A POST-KEYNESIAN APPROACH

Abstract

The current paper aims primarily discussing the conducting of economic, monetary and fiscal policy, during a time of financial fragility through a macro dynamic model. Historical evidences show that in order to avoid periods of economical depression and enduring panics as happened during the Great Depression, the economical policy should be coordinated. The combination of low interest rate and the increase of public deficit is essential to stabilize the system. The proposed model starts from the macroeconomic Kaleckiana identity of profit determination and in addition, it uses the fundamental concepts of the post-Keynesian thoughts. The results indicate that the combination of interest rate drop and expansion of the public deficit is relevant to stabilize the system in periods of financial vulnerability of private companies. In case of collapse of the marginal capital efficiency as a consequence of depreciation of the state trust, dropping interests to a “liquidity trap” level, it becomes crucial to stabilize the model.