Statistical Analysis of Minsky’s Financial Instability Hypothesis for the 1945–2023 Era

Abstract

Following the 2008 financial crisis, Hyman Minsky’s Financial Instability Hypothesis (FIH) emerged as a prominent financial theory to explain the occurrence of business cycles in the U.S. economy. There have been many theoretical, but few empirical studies dedicated to FIH. The current literature also lacks the statistical support to confirm the necessary conditions leading to financial instability and whether FIH concepts remains applicable in the post 1980s periods. This article presents a statistical methodology to analyze the financial debt ratios related to FIH for the 1945–2023 periods through the use of nonparametric statistical analyses of ordered alternatives and a binomial test for meta-analysis. The results indicated that the conditions leading to financial instability such as debt ratios did increase prior to the onset of a recession as prescribed by FIH during the 1945–1980s era. Furthermore, such conditions also repeated prior to some recessions occurred in the 2001–2023 periods. This study provides statistical support for Minsky’s FIH theory.