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This project applies Minsky's financial instability hypothesis to the U.S. household sector, examines the causes and implications of debt-driven growth, and develops an econometric macro analysis of household debt unsustainability. The literature review entails an analysis of different business cycle perspectives, consumption theories, and household debt dynamics. It starts off with Keynes, goes through various schools of thought, and ends with Minsky. The stylized facts encompass critical macro-analysis of the US economy dynamically transforming from a long period of stability to a period of instability. Furthermore, an emphasis is placed on business cycle recovery, unemployment, institutional changes, sectoral balances, wage stagnation, financialization, and household consumption and debt dynamics. In addition, we apply VAR and VEC models to illustrate that even though in the short-run, there is a positive association between household debt and economic growth, in the long run, household debt-driven growth is unsustainable with the 2008 recession being the final devastating outcome.
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This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.
Simoski, Simon, "A New Economic Paradigm: Household Debt-Driven Growth" (2017). Senior Projects Spring 2017. 41.