Evolutionary finance and central banking

Abstract

This article considers Minsky’s contribution to evolutionary economics, paying attention to his concepts of evolutionary finance and central banking. Evolutionary finance is defined by Minsky as the process through which changes in effective demand, uncertainty and cash flows trigger solvency and liquidity risk that increase financial fragility and the possibility of financial instability and debt deflation. Emphasis is placed on the role of Ponzi position making operations and failed margins of safety in inducing low-quality leverage and liability structures. Evolutionary central banking is defined by Minsky as the process that central banks use by applying qualitative monetary policy through discount window procedures and lender-of-last-resort interventions to target Ponzi leverage structures and financial stability. Evolutionary central banking provides operational guidelines and objectives that help us understand the monetary policies adopted by central banks after the Global Financial Crisis of 2007–2008, as well as the limitations of the non-conventional monetary policies.