Minsky from the bottom up – Formalising the two-price model of investment in a simple agent-based framework

This paper presents a fully formalised version of Hyman Minsky’s two-price model of capital investment embedded in a macroeconomic model consisting of an agent-based sector of consumption goods firms as well as three strongly simplified aggregated sectors. In an innovation to the literature on Minsky models, the model is calibrated empirically using moments drawn from US data, demonstrating that it is capable of producing plausible time series. Simulations show that the individual investment and financing choices made by the agent-based firms lead to the emergence of business cycles at the aggregate level. Key aspects of the model can be closely related to central concepts from the financial accelerator literature and moreover, it is demonstrated through simulation experiments that expectations and sentiment dynamics play an important role, being able to amplify or dampen the cycles. It is also shown that the introduction of fiscal policy, monetary policy, or a restriction on firm dividend payouts can contribute to a stabilisation of the model.