Show Less

Financial Fragility and Investment in the Capitalist Economy

The Economic Legacy of Hyman Minsky, Volume II

Edited by Riccardo Bellofiore and Piero Ferri

Hyman Minsky is renowned for his theoretical and empirical investigation of the capitalist economy. In this book, a distinguished group of contributors provides an authoritative account of his contribution to the analysis of capitalism and, more particularly, to the fields of monetary and post Keynesian economics.
Buy Book in Print
Show Summary Details
You do not have access to this content

Chapter 8: Financial instability revisited: aggregate fluctuations due to changing financial conditions of heterogeneous firms

Domenico Delli Gatti and Mauro Gallegati

Extract

8. Financial instability revisited: aggregate fluctuations due to changing financial conditions of heterogeneous firms Domenico Delli Gatti and Mauro Gallegati 1 INTRODUCTION Hyman Minsky’s financial instability hypothesis is grounded in a vision of the economy as a system populated by heterogeneous financially constrained firms, which he classified as hedge, speculative and Ponzi units according to their degree of financial fragility. Changes in the financial conditions of each and every firm – that is, changes in their balance-sheet positions – drive economic fluctuations: ‘We can conceive of a scale of financial robustness – financial fragility which depends upon the mixture of hedge, speculative and Ponzi financing outstanding. As the proportion of hedge financing decreases the financial structure migrates toward fragility’ (Minsky, 1982, p. 33). This approach was already outlined in his Ph.D. dissertation (Minsky, 1954), where firms are differentiated by financial condition and technological level, and is developed further in his mature production.1 Minsky’s characterization of his own work – a financial theory of investment and an investment theory of aggregate demand and the business cycle – is grounded in a view of the economy in which agents’ heterogeneity plays a crucial role. In this chapter we emphasize this aspect of Minsky’s theory. We model an economy in an uncertain environment with capital market imperfections due to limited (asymmetric) information.2 Each firm is characterized by a degree of financial fragility, inversely related to the ratio of the equity base to the capital stock – the equity ratio for short – which affects supply and capital accumulation decisions....

You are not authenticated to view the full text of this chapter or article.

Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.

Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.

Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.


Further information

or login to access all content.