Edited by Jan Toporowski and Jo Michell
Chapter 14: Financial fragility
An economic unit is said to be financially fragile when its financial positions are expect to require a high reliance on debt refinancing and/or selling assets in order to meet its liability commitments (debt services, margin calls, insurance premiums, and all other contractual cash outflows induced by financial contracts). The term ‘financial positions’ refers to the structure of the balance sheet (defined broadly to include off-balance-sheet items) and the cash inflows and cash outflows induced respectively by assets and liabilities. Alternatively, financial fragility can be defined as the high sensitivity of financial positions to changes in asset prices, credit conditions, and economic growth, in such a way that not-unusual fluctuations in the previous variables create difficulties to meet liability commitments. Irving Fisher’s Booms and Depressions (1932) has been highly influential in the study of financial fragility even though economists like Thorstein Veblen, Joseph Schumpeter, and Wesley Mitchell dealt with the subject earlier than him. Fisher had the advantage of observing the disintegration of the economy (and his personal finances) during the Great Depression, which allowed him to develop a much richer framework of analysis.
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