Handbook of Critical Issues in Finance
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Handbook of Critical Issues in Finance

Edited by Jan Toporowski and Jo Michell

This vital new Handbook is an authoritative volume presenting key issues in finance that have been widely discussed in the financial markets but have been neglected in textbooks and the usual compilations of conventional academic wisdom.
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Chapter 5: Capital market inflation

Henryk Braun


The theory of capital market inflation was developed by Jan Toporowski in the early 1990s, when he was writing his book The Economics of Financial Markets and the 1987 Crash (1993). He was trying to make sense of a clearly unstable capital market: his first job was in fund management for the Church Commissioners for England where he witnessed at first hand the stock market crash of 1974 and the associated secondary banking crisis. The mainstream theory was preoccupied with informationally efficient (or inefficient, in the case of new Keynesian theory) equilibrium in the financial markets, an equilibrium clearly absent at critical times, and not just because of temporary adjustment difficulties. The theory was inspired by Toporowski’s reflections on financial aspects of the business cycle theories of Micha_ Kalecki (on whom Toporowski labours incessantly) and a superficial reading of the work of Hyman P. Minsky, whom Toporowski had met a few years earlier. The actual term ‘capital market inflation’came from a remark by the French post-Keynesian Alain Parguez who, at a special seminar in University College London, observed that Keynes’s theory was a ‘theory of capital market inflation’.

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