The Financial Instability Hypothesis

Minsky, Hyman P.

doi:10.2139/ssrn.161024

Cited by 375 publications

(411 citation statements)

References 20 publications

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“…Secondly, the model has a very small number of easily-estimated parameters and the equilibrium solution loses stability over a very large region of the parameter space that includes simple but conservative estimates of the parameters. Thirdly, while the model itself is quantitative and new it shares important features with more qualitative, but long-standing, critiques of equilibrium assumptions ( [Robinson 1974, Minsky 1992 as well as numerous others before and after).…”

Section: Implications and Concluding Remarksmentioning

confidence: 99%

Implausible Equilibrium Solutions in Economics and Finance

Lamba

2014

SSRN Journal

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When modelling the aggregate behavior of a population over long periods of time the standard approach is to consider the system as always being in equilibrium -using averaging procedures based upon assumptions of rationality, utility-maximization and a high degree of independence amongst the agents. These analytically tractable models are fully determined by a small number of variables and the future evolution of the system is decoupled from its past. Previous studies [Akerlof and Yellen 1985, Scharfstein andStein 1990] suggested that allowing a subset of the agents to be nonmaximizing might shift the equilibrium solution but a shortcoming in those analyses prevented the possibility of non-equilibrium solutions.We show how equilibrium assumptions and solutions can be 'stresstested' by embedding the models within frameworks capable of far-fromequilibrium dynamics. This procedure is applied to Brownian motion (Random walk) asset pricing which serves as our prototypical equilibrium model.The introduction of a simple, yet plausible, form of non-maximizing coupling between the agents results in endogenous fluctuations that destabilize the equilibrium solution. These fluctuations typically consist of long periods of increasingly severe mispricing followed by rapid, unannounced, corrections. Importantly, this occurs at realistic parameter values and is consistent with the observed price dynamics of real markets. Furthermore the mispricing phase may be mistaken for a trend in the fundamentals of the equilibrium model. We argue that the 'boom-bust' nature of the destabilizing endogenous dynamics is likely to be prevalent in economic systems at all scales. All the mainstream schools of economic thought and, in turn, modern finance have been strongly motivated by the mathematical elegance and predictive success of Newtonian mechanics and statistical physics. This has resulted in mathematical models constructed so that the solution is a stable, usually unique, equilibrium described by a small number of variables and whose future evolution is independent of its past states. Indeed the notion of equilibrium has become a unifying concept in modern economics although its precise meaning varies with context. Here we shall consider those equilibrium models that attempt to describe systems involving large numbers of interacting agents over significant periods of time. Some examples, discussed briefly below, include the supply-demand curves of microeconomics, the Brownian motion description of asset prices, and the DSGE models used in macroeconomics and central banking.In the physical sciences, equilibria are most often studied as the limiting values of dynamical systems where the short-term transient behavior may not even be of interest. However, economic systems have no such end-state [Robinson 1974] and so the only remaining (legitimate) justification for equilibrium models requires the assumption that equilibrating processes operate (and dominate) over timescales shorter than or comparable to any exogenous changes. Th...

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Section: Implications and Concluding Remarksmentioning

confidence: 99%

Implausible Equilibrium Solutions in Economics and Finance

Lamba

2014

SSRN Journal

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“…The super-Minsky cycle is less well recognized, though it is fully articulated in a paper co-authored with Piero Ferri (Ferri and Minsky, 1992) that deserves far greater recognition. Unfortunately, the critical arguments in that paper were omitted in Minsky's (1992) brief article titled "The Financial Instability Hypothesis" in which he summarized his theory.…”

Section: Minsky As Cycle Theoristmentioning

confidence: 99%

“…Much has been written on the basic cycle, and Minsky (1992) carefully defined its stages. "Hedge finance units are those which can fulfill all of their contractual payment obligations by their cash flows (Minsky, 1992, p.7)", and it tends to be associated with greater weight of equity financing in the liability structure.…”

Section: Minsky As Cycle Theoristmentioning

confidence: 99%

“…"Hedge finance units are those which can fulfill all of their contractual payment obligations by their cash flows (Minsky, 1992, p.7)", and it tends to be associated with greater weight of equity financing in the liability structure. "Speculative finance units are units that can meet their payment commitments on "income account" on their liabilities, even as they cannot repay the principle out of cash flows.…”

Section: Minsky As Cycle Theoristmentioning

confidence: 99%

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A Theory of Minsky Super-cycles and Financial Crises

Palley

2011

Contributions to Political Economy

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte.

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“…We contribute to this literature by developing and exploiting a model which endogenously generates cycles in the spirit of Minsky's Financial Instability Hypothesis (see Minsky, 1978Minsky, , 1986 and captures the main properties of leverage cycles, as described e.g. in Geanakoplos (2009)…”

Section: Introductionmentioning

confidence: 99%

Bubbles, Crashes, and the Financial Cycle: The Impact of Banking Regulation on Deep Recessions

Hoog

Dawid

2017

Macroecon. Dynam.

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This paper explores how different credit market-and banking regulations affect business fluctuations. Capital adequacy-and reserve requirements are analysed for their effect on the risk of severe downturns. We develop an agent-based macroeconomic model in which financial contagion is transmitted through balance sheets in an endogenous firm-bank network, that incorporates firm bankruptcy and heterogeneity among banks to capture the fact that contagion effects are bank-specific. Using concepts from the empirical literature to identify amplitude and duration of recessions and expansions we show that more stringent liquidity regulations are best to dampen output fluctuations and prevent severe downturns. Under such regulations both leverage along expansions and amplitude of recessions become smaller. More stringent capital requirements induce larger output fluctuations and lead to deeper, more fragile recessions. This indicates that the capital adequacy requirement is pro-cyclical and therefore not advisable as a measure to prevent financial contagion.

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The Financial Instability Hypothesis

Cited by 375 publications

References 20 publications

Implausible Equilibrium Solutions in Economics and Finance

Implausible Equilibrium Solutions in Economics and Finance

A Theory of Minsky Super-cycles and Financial Crises

Bubbles, Crashes, and the Financial Cycle: The Impact of Banking Regulation on Deep Recessions

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