A Critical Analysis of the Financial Frictions Approach in a Minskyan Perspective

Abstract

The concept of financial frictions is at the core of the Financial Frictions Approach (FFA) which underlines that to explain the financial crisis of 2007–2008 it is sufficient to add the financial system to the New Keynesian Dynamic Stochastic General Equilibrium (NK-DSGE) model. Many economists have cited Hyman Minsky among those who “emphasized the importance of financial frictions.” The aim of this work is: 1) to show that Minsky cannot be considered the precursor of the FFA and that FFA does not allow for a solid explanation of financial crises; and 2) to present a sound explanation of the financial instability affecting capitalist economies based on two teachings characterizing Minsky’s work. The first consists in Minsky’s interpretation of John Maynard Keynes’s General Theory, which recovers the revolutionary elements of Keynes’s thought neglected by the Neoclassical Synthesis. The second teaching consists in underlining the need to integrate Keynes’s and Joseph Schumpeter’s theoretical frameworks.