Abstract

http://ssrn.com/abstract=161024
 
 

Citations (82)



 


 



The Financial Instability Hypothesis


Hyman P. Minsky


Deceased

May 1992

The Jerome Levy Economics Institute Working Paper No. 74

Abstract:     
The Financial Instability Hypothesis (FIH) has both empirical and theoretical aspects that challenge the classic precepts of Smith and Walras, who implied that the economy can be best understood by assuming that it is constantly an equilibrium-seeking and sustaining system. The theoretical argument of the FIH emerges from the characterization of the economy as a capitalist economy with extensive capital assets and a sophisticated financial system.

In spite of the complexity of financial relations, the key determinant of system behavior remains the level of profits: the FIH incorporates a view in which aggregate demand determines profits. Hence, aggregate profits equal aggregate investment plus the government deficit. The FIH, therefore, considers the impact of debt on system behavior and also includes the manner in which debt is validated.

Minsky identifies hedge, speculative, and Ponzi finance as distinct income-debt relations for economic units. He asserts that if hedge financing dominates, then the economy may well be an equilibrium-seeking and containing system: conversely, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a "deviation-amplifying" system. Thus, the FIH suggests that over periods of prolonged prosperity, capitalist economies tend to move from a financial structure dominated by hedge finance (stable) to a structure that increasingly emphasizes speculative and Ponzi finance (unstable). The FIH is a model of a capitalist economy that does not rely on exogenous shocks to generate business cycles of varying severity: business cycles of history are compounded out of (i) the internal dynamics of capitalist economies, and (ii) the system of interventions and regulations that are designed to keep the economy operating within reasonable bounds.

Number of Pages in PDF File: 10

JEL Classification: E32

working papers series





Download This Paper

Date posted: July 30, 1999  

Suggested Citation

Minsky, Hyman P., The Financial Instability Hypothesis (May 1992). The Jerome Levy Economics Institute Working Paper No. 74. Available at SSRN: http://ssrn.com/abstract=161024 or http://dx.doi.org/10.2139/ssrn.161024

Contact Information

Hyman P. Minsky (Contact Author)
Deceased
N/A
Feedback to SSRN


Paper statistics
Abstract Views: 46,656
Downloads: 14,146
Download Rank: 102
Citations:  82

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo5 in 0.313 seconds