An Insider’s View on the Economics of Hyman Minsky
Chapter 15: A meta-model of the financial instability hypothesis
This chapter tries to insert Minsky’s financial instability hypothesis into a meta-model capable of considering all the different specifications. In particular, it is based upon a regime switching technique that is particularly fit for taking two Minsky theorems into consideration. The first theorem is that the economy has financing regimes under which it is stable and others under which it is unstable. The second is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for unstable system. These two theorems can be analyzed by means of a regime switching mechanism. The interaction between financial and real aspects is capable of generating persistent fluctuations that are the natural soil in which behavior à la Ponzi can take place and financial instability phenomena are generated.
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