A Macroeconometric Assessment of Minsky's Financial Instability Hypothesis

30 Pages Posted: 6 Sep 2013 Last revised: 26 Nov 2013

See all articles by Matthew Greenwood-Nimmo

Matthew Greenwood-Nimmo

University of Melbourne; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Artur Tarassow

University of Hamburg

Date Written: November 13, 2013

Abstract

The Financial Instability Hypothesis associated with Hyman Minsky has profound implications for the conduct of monetary policy in modern capitalist economies. At its core is the proposition that the central bank may contribute to the financial fragility of leveraged firms in its pursuit of inflation-targeting interest rate policies. This paper develops a small macroeconomic model incorporating many of the salient features of a Minskyan economy. The imposition of the resulting theoretical restrictions in a CVAR model provides support for Minsky's main proposition that interest rate innovations can drive a wedge between the cash-inflows of firms and their debt-servicing obligations. The paper concludes that the implementation of countercyclical capital requirements can provide monetary policymakers with additional policy instruments that can be used to cool overheated sectors without recourse to the 'blunt instrument' of interest rate policy.

Keywords: Monetary Policy, Inflation Targeting, Financial Instability Hypothesis, Cointegrating VAR, Asset Price Cycles

JEL Classification: C32, C51, E32, E52

Suggested Citation

Greenwood-Nimmo, Matthew and Tarassow, Artur, A Macroeconometric Assessment of Minsky's Financial Instability Hypothesis (November 13, 2013). Available at SSRN: https://ssrn.com/abstract=2320964 or http://dx.doi.org/10.2139/ssrn.2320964

Matthew Greenwood-Nimmo (Contact Author)

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Artur Tarassow

University of Hamburg ( email )

Allende-Platz 1
Hamburg, 20146
Germany

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