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Debt and Financial Sentiment. Early Keynes on Balance Sheet Effects of Asset Price Changes

Debt and Financial Sentiment. Early Keynes on Balance Sheet Effects of Asset Price Changes
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Year:    2020

Author:    Ertürk, Korkut Alp, Jennings, Jake

Vierteljahrshefte zur Wirtschaftsforschung, Vol. 89 (2020), Iss. 1 : pp. 45–58

Abstract

Summary: The paper explores the link between financial sentiment and private debt, using Keynes’s A Treatise on Money as a conceptual backdrop. In responding to his critics after the publication of his General Theory Keynes famously talked about unexpected, violent changes in conventional asset valuations resulting from doubts with a life of their own boiling over onto the surface. Such doubts he argued influenced the size of what he called the bear position, which in his Treatise on Money he took to be an index of financial sentiment. Minsky also drew from Keynes’s earlier work when he famously argued that optimistic future expectations raise asset prices, creating a margin that enables firms to access finance in the present. However, neither asset price speculation nor shifting financial sentiment over the business cycle received in his work the kind of attention they did in Keynes’s Treatise. The focus of this paper is what Minsky left unexplored on financial sentiment and the balance sheet effects of asset price changes in the Treatise, which sheds light on when private debt can become excessive. The central insight is that financial sentiment begins to diverge when economic performance unexpectedly falls short, raising doubts that current asset prices are excessive. While the economy might be debt-led when financial sentiment is strong it tends to become debt-burdened as sentiment weakens.

Journal Article Details

Publisher Name:    Global Science Press

Language:    English

DOI:    https://doi.org/10.3790/vjh.89.1.45

Vierteljahrshefte zur Wirtschaftsforschung, Vol. 89 (2020), Iss. 1 : pp. 45–58

Published online:    2020-01

AMS Subject Headings:    Duncker & Humblot, Duncker & Humblot

Copyright:    COPYRIGHT: © Global Science Press

Pages:    14

Keywords:    E12 E32 E44 B26 Speculation credit money supply asset pricing

Author Details

Ertürk, Korkut Alp

Jennings, Jake

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Section Title Page Action Price
Private Debt 45
Korkut Alp Ertürk, and Jake Jennings: 45
 Debt and Financial Sentiment. Early Keynes on Balance Sheet Effects of Asset Price Changes 45
1 Introduction 46
2 Keynes’s Treatise on Money in Context 47
3 Balance Sheet Effects of Shifts in Asset Price Expectations 50
4 Three Views on what Constrains Bank Lending 45
5 Conclusion 45
References 45