Theory Of Financial Instability Research Articles

Stabilizing a Keynes-Minsky Model of Financial Fragility

The profound insights provided by Minsky's theory of financial instability are insufficient. On the one hand, as Marxists and other critics have pointed out, they tend to dissociate finance from the instability-creating dynamics of the wider economy. On the other hand, they tend to depict the state as an exogenous, stabilizing, influence. This creates an inherent tension in Minsky's analysis, which also insists, “stability is destabilizing.” A Marxist understanding resolves this tension. The state is an essential and active component of capitalism and its contradictions. State interventions may attenuate some of capitalism's destabilizing processes but these displace rather than eliminate the underlying contradictions and themselves contribute to longer-term instability and crises.

Financial Instability: Theoretical Aspects and Its Causes

Economic fluctuations are in close attention of scientists - economists. The institution that provokes the «thirst» for speculation and causes external shocks is the central bank. The «anarchy of production» by K. Marx, as an integral part of the unplanned economy, becomes the reason for the creation of production «disproportions». The research examined the causes of economic fluctuations, used the approaches of different scientific schools in the study of financial instability. It was determined that H. Minsky developed the «financial theory of investments and the investment theory of the cycle», synthesized the financial factors of development with the real factors of the occurrence of the cycle, which are ultimately reflected in the balance sheet of the enterprise. It was revealed that Minsky, in his theory of financial instability, established that over a certain period, the development of an economy with a «stable» financial structure, where hedging prevails, naturally moves to an economy with a «fragile» financial structure, dominated by speculation and even Ponzi schemes.

Minsky: moeda, restrição de sobrevivência e hierarquia do sistema monetário globalizado

Resumo Hyman Minsky é, em geral, conhecido por sua teoria da instabilidade financeira. Na sua visão, as crises no sistema capitalista moderno têm origem endógena, por causa da tendência de empresas e bancos a adotarem um comportamento cada vez mais especulativo, na medida em que a estabilidade econômica se prolonga. Outros conceitos originais e igualmente relevantes desenvolvidos por Minsky são menos tratados pela literatura, inclusive pós-keynesiana. É o caso da “restrição de sobrevivência”. Esse texto pretende cobrir essa lacuna, apresentando e discutindo a relevância da restrição de sobrevivência do ponto de vista da teoria da moeda e da conformação hierarquizada que o sistema monetário globalizado tomou a partir da Crise de 2008.

Forecasting a Cyclical Downturn (Recession) in the US Economy Using a Mathematical Model of Hyman Minsky’s Theory of Financial Instability

By using the US economy as an example, the paper shows how the COVID-19 pandemic has changed its short-term dynamics, causing a deep crisis recession in 2020 rather than the expected short-term and shallow recession in 2022 caused by the inflation of the financial bubble during the credit expansion that followed the financial and economic crisis of 2008–2009. To predict the latter scenario, which is natural for the US economy, the authors first developed a mathematical model based on Hyman Minsky’s theory of financial instability, which can serve to manage the processes of credit expansion and contraction in an unstable economy.

Gendering Post-Keynesian Monetary Macroeconomics With Situated Knowledge

This paper suggests that the conception of fundamental uncertainty grounding post-Keynesian monetary macroeconomics is consistent with a particularly complex type of decision making characterized by the social determination of preferences and outcomes. Contrary to the argument that positivism grounds post-Keynesian analysis, such a framework of analysis reflects a world in which knowledge is situated. As a practical consideration, this paper considers briefly the implications for a gendered theory of financial instability in a Post-Keynesian monetary framework.

Marx after Minsky: Capital Surplus and the Current Crisis

Minsky’s theory of financial instability helps clarify how Marxist theory can explain the highly financialised capitalism of today, and the crisis which started in 2008. The advanced economies currently have high realised profits in the productive sector and lagging rates of investment. Shareholder pressures encourage corporate strategies which focus on stock-market ratings and M&A operations, less on productive investment. Tax evasion and the build-up of reserve cash piles by corporations have contributed to a global surplus of what Marx calledloanable capital. This surplus has been augmented by the increasing inequality of personal wealth ownership and, in the international economy by, large current-account surpluses. The results include: huge profits for the financial system; low interest rates; recurrent boom and bust in asset markets; the fuelling of huge increases in household and government debt; and the combination of instability and stagnation which results from an excess supply of loanable capital.

Minsky cycles in Keynesian models of growth and distribution

his paper provides an alternative formalization of Minsky's theory of financial instability and examines the conditions under which perpetual cycles emerge from endogenous changes in financial practices. The main features of our model are found in its emphasis on (1) the interaction between debt and portfolio dynamics, (2) the importance of margins of safety in the evolution of firms' indebtedness, and (3) the decisive role of the dynamics of capital gains and expectations in asset markets. The general framework of financial instability is combined with two Keynesian models of growth and distribution (Kaleckian vs Kaldorian).

THE PARADOX OF DEBT AND MINSKY'S FINANCIAL INSTABILITY HYPOTHESIS

ABSTRACTSome authors have claimed that the paradox of debt invalidates Minsky's theory of financial instability. Their theoretical frameworks are radically different from Minsky's in several aspects. Important Minskian elements, the role of margins of safety as a basis of financial decisions and the effects of asset prices on debt dynamics, among others, are absent in the critics' frameworks. We maintain that the thrust of the paradox of debt‐based criticism to Minsky's theory has been exaggerated and key insights of Minsky's theory of financial instability can be formalized in an alternative macroeconomic framework. We provide a stock‐flow consistent model of Minskian long waves.

Shadow Banking and the Limits of Central Bank Liquidity Support: How to Achieve a Better Balance between Global and Official Liquidity

Global liquidity provision is highly procyclical. The recent financial crisis has resulted in a flight to safety, with severe strains in key funding markets leading central banks to employ highly unconventional policies to avoid a systemic meltdown. Bagehot’s advice to “lend freely at high rates against good collateral” has been stretched to the limit in order to meet the liquidity needs of dysfunctional financial markets. As the eligibility criteria for central bank borrowing have been tweaked, it is legitimate to ask, How elastic should the supply of central bank currency be?Even when the central bank has the ability to create abundant official liquidity, there should be some limits to its support for the financial sector. Traditionally, the misuse of the fiat money privilege has been limited by self-imposed rules that central bank loans must be fully backed by gold or collateralized in some other way. But since the onset of the crisis, we have seen how this constraint has been relaxed to accommodate the demand for market support. My suggestion is that there has to be some upper limit, and that we should work hard to find guidelines and policies that can limit the need for central bank liquidity support in future crises. In this paper, I review the recent expansion of central bank liquidity support during the crisis, before discussing the collateral polices related to central banks’ lender-of-last-resort and market-maker-of-last-resort policies and their rationale. I then examine the relationship between the central bank and the treasury, and the potential threat to central bank independence if they venture into too much risky balance sheet expansion. A discussion about the exceptional growth of the shadow banking system follows. I introduce the concept of “liquidity illusion” to describe the fragility upon which much of the sector is based, and note that market growth has been based largely on a “fair-weather” view that central banks will support the market on rainy days.I argue that we need a better theoretical framework to understand the growth in the shadow banking system and the role of central banks in providing liquidity in a crisis.Recently, the concept of “endogenous finance” has been used to explain the strong procyclical tendencies of the global financial system. I show that this concept was central to Hyman P. Minsky’s theory of financial instability, and suggest that his insights should be integrated into the ongoing search for a better theoretical framework for understanding the growth of the shadow banking system and how we can limit official liquidity support for this system. I end the paper with a summary and a discussion of some of the policy issues. I note that the Basel III “package” will hopefully reduce the need for central bank liquidity support in the future, but suggest that further structural reforms of the financial sector are needed to ease the tension between freewheeling private credit expansion and the limited ability or willingness of central banks to provide unlimited official liquidity support in a future crisis.

Optimization of Decision Process in a Theory of Financial Instability

A theory of financial instability, positively verified through adverse consequences of the global financial crisis that started in 2007, demonstrates the significance put on adequate decision making in present age. Thus, optimization of operations in this respect applies to providing suitable frameworks for supervision and functioning of financial markets which may be more predictable and secure for individual stakeholders.

How Sensitive are Equilibrium Pricing Models to Real-World Distortions?

In both finance and economics, quantitative models are usually studied as isolated mathematical objects - most often defined by very strong simplifying assumptions concerning rationality, efficiency and the existence of disequilibrium adjustment mechanisms. This raises the important question of how sensitive such models might be to real-world effects that violate the assumptions. We show how the consequences of rational behavior caused by perverse incentives, as well as various irrational tendencies identified by behavioral economists, can be systematically and consistently introduced into an agent-based model for a financial asset. This generates a class of models which, in the special case where such effects are absent, reduces to geometric Brownian motion - the usual equilibrium pricing model. Thus we are able to numerically perturb a widely-used equilibrium pricing model market and investigate its stability. The magnitude of such perturbations in real markets can be estimated and the simulations imply that this is far outside the stability region of the equilibrium solution, which is no longer observed. Indeed the price fluctuations generated by endogenous dynamics, are in good general agreement with the excess kurtosis and heteroskedasticity of actual asset prices. The methodology is presented within the context of a financial market. However, there are close links to concepts and theories from both micro- and macro-economics including rational expectations, Soros' theory of reflexivity, and Minsky's theory of financial instability.

A Post-Keynesian Model of Accumulation with a Minskyan Financial Structure

Minsky's theory of financial instability is a strong alternative to neoclassical theory. Many Post-Keynesian authors use this analysis in order to elaborate models that give rise to crises or business cycles. Nevertheless, none of them has directly linked growth and financial structure. This article proposes a simple macroeconomic model linking the accumulation of capital and the state of the financial structure as defined by Minsky. The analysis shows how a capitalist economy may become financially fragile, and it suggests that instability is apt to be the rule.

A Theory of Financial Instability

Review of Can It Happen Again? Essays on Instability and Finance by Hyman P. Minsky. This article can also be found at the Monthly Review website , where most recent articles are published in full. Click here to purchase a PDF version of this article at the Monthly Review website.