The Missing Macro Link
This paper addresses the critique of the aggregational problem attached to the financial instability hypothesis of Hyman Minsky. The core of this critique is based on the Kaleckian analytical framework and, in very broad terms, states that the expenditure of ﬁrms for investment is at the same time a source of income for the ﬁrms producing capital goods. Hence, even if investments are debt ﬁnanced, as in Minsky’s analysis, the overall level of indebtedness of the ﬁrm sector remains unchanged, since the debts of investing ﬁrms are balanced by the income of capital goods–producing ﬁrms. According to the critics, Minsky incurs a fallacy of composition when he does not take this dynamic into account when applying his micro analysis of investment at the macro level. The aim of this paper is to clarify the consequences of debt-ﬁnanced investments over the ﬁnancial structure of an aggregate economy. Starting from the works of Michał Kalecki and Josef Steindl, we developed a stock-flow consistent analysis of a highly simpliﬁed economy under four different ﬁnancial regimes: (1) debt-ﬁnanced with no distributed profits, (2) debt-ﬁnanced with distributed proﬁts, (3) internally ﬁnanced with no distributed proﬁts, and (4) internally ﬁnanced with distributed proﬁts. The results of our investigation show that debt-ﬁnanced investments do not lead to a worsening of the ﬁnancial position of the ﬁrm sector only if specific assumptions are taken into account.