Financial structure, financial instability, and inflation targeting

Abstract

Minsky, the first to propose the financial instability hypothesis, stressed the importance of the lender-of-last-resort for preventing financial instability. Overall, however, most of the research on financial instability has focused little on measures to prevent instability. Japan was trapped in a prolonged recession after the collapse of the bubble economy. The government promoted market-oriented economic reforms to cope. The recent international monetary crisis, triggered by the subprime loan crisis of 2007 in the US, cast a dark shadow over the world economy. Some developed nations, most notably New Zealand have been successful in implementing inflation-targeting policies. The Bank of Japan and the US Federal Reserve have adopted the inflation-targeting measures after the crisis. The main purpose of this paper is to examine financial instability, financial cycles, and the effects of inflation targeting in a mixed competitive–oligopolistic system. The results of this paper demonstrate that inflation targeting stabilizes an economy in both competitive and oligopolistic systems.