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Monetary Policy in an Era of Capital Market Inflation By

By Of Bard College


The theory of capital market inflation argues that the values of long-term securities markets are determined by a disequilibrium inflow of funds into those markets. The resulting overcapitalization of companies leads to increased fragility of banking and undermines monetary policy and stable relationships between short- and long-term interest rates, such as that postulated by Keynes in his theory of the speculative demand for money. Moreover, while the increased fragility of banking is an immediate effect, capital market inflation also creates an unstable Ponzi financing In his first systematic exposition of his theory of financial fragility, written in 1960, Minsky excused a rather sketchy account of the capital (stock) market with the remark that ‘only experience will enable us to know if the widespread indirect ownership of equities through mutual funds has increased or decreased the stability of equity markets ’ (Minsky 1964, p. 195). To th

Year: 1999
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