The paradox of debt and Minsky cycle: Nonlinear effects of debt and capital and variety of capitalism

• This study shows the importance of non-financial corporates’ retention rate in both short-run debt-led and debt-burdened conditions and how it influences the dynamics of the long-run debt cycle. • In the debt-led demand regime, the driver of the cycle is the return on dividends, leading to a higher share price and consumption out of wealth . In addition, debt-led growth without investment raises questions about the sustainability of such capitalism. • The stagnation in the debt-burdened demand regime can be transformed into a stable cyclical growth when the autonomous investment level is sufficiently high. • The paradox of the debt cycle conditioned with sufficiently high animal spirits is a long-wage growth cycle affected by changes in institutional behavior, such as corporate governance and nonfinancial firms’ animal spirits. To study the variety of financialized capitalism contingent on firms’ institutional behavior, we model the US type of shareholder-oriented capitalism with the Minskyan cycle and the Japanese type of partially fledged financialized capitalism with high firm retention rates using the paradox of debt (Steindl) cycle. The results show: 1) instability could arise when firms have a high retention rate of profit to deleverage; 2) the debt-led and the debt-burdened demand regimes can be distinguished by setting sufficiently low retention rates for the former and that of high rates for the latter; 3) the level of retention rate is important in determining the short-run condition but also sets the condition of the long-run Minsky or Steindl debt cycle while we observe secular stagnation in the accumulation rate; 4) the debt-burdened demand transforms into a long-wave cyclical growth with sufficiently high firms' animal spirits, which exhibits the possibility of demand-led cyclical growth.