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A simplified stock-flow consistent dynamic model of the systemic financial fragility in the ‘New Capitalism’

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  • Passarella, Marco

Abstract

In the last few years, many financial analysts and heterodox economists (but even some ‘dissenters’ among orthodox economists) have referred to the contribution of Hyman P. Minsky as a fundamental reading for understanding the current crisis. However, it is well known that the traditional formulation of Minsky's ‘financial instability hypothesis’ raises a number of theoretical issues. Furthermore, Minsky's analysis of capitalism must be updated on the basis of the deep changes which, during the last three decades, have concerned the world economy. In order to address these theoretical and empirical issues, the paper, first, introduces the reader to the ‘mechanics’ of the financial instability theory, according to the formulation of the traditional Minskian literature (Section 2). Second, it shows that Minsky's theory, in this formulation, cannot be regarded as a general theory of the business cycle (Section 3). Third, the paper attempts to supply a consistent, although simplified, updating of Minsky's theory by cross-breeding it with inputs coming from the ‘New Cambridge’ theories and the current ‘formal Minskian literature’. The aim of this is to analyse the impact of both capital-asset inflation and consumer credit on the financial ‘soundness’ of the business sector (Sections 4–7). Some concluding remarks are provided in the last part of the paper (Section 8).

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 83 (2012)
Issue (Month): 3 ()
Pages: 570-582

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Handle: RePEc:eee:jeborg:v:83:y:2012:i:3:p:570-582

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Keywords: Financial instability; Stock-flow consistency; Capital-asset inflation;

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References

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  1. Piero Ferri & Hyman P. Minsky, 1991. "Market Processes and Thwarting Systems," Economics Working Paper Archive wp_64, Levy Economics Institute.
  2. Graziani,Augusto, 2003. "The Monetary Theory of Production," Cambridge Books, Cambridge University Press, number 9780521812115, October.
  3. Marco PASSARELLA, 2010. "The Paradox of Tranquility Revisited. A Lotka-Volterra Model of the Financial Instability," Rivista Italiana degli Economisti, SIE - Societa' Italiana degli Economisti (I), vol. 15(1), pages 69-104, April.
  4. Lavoie, M. & Seccareccia, M., 1999. "Minsky's Financial Fragility Hypothesis: a Missing Macroeconomic Link?," Working Papers 9904e, University of Ottawa, Department of Economics.
  5. Alessandro Vercelli, 2011. "A Perspective on Minsky Moments: Revisiting the Core of the Financial Instability Hypothesis," Review of Political Economy, Taylor & Francis Journals, vol. 23(1), pages 49-67.
  6. Jan Toporowski, 2008. "Minsky's 'induced investment and business cycles'," Cambridge Journal of Economics, Oxford University Press, vol. 32(5), pages 725-737, September.
  7. Wynne Godley & Dimitri B. Papadimitriou & Gennaro Zezza, 2007. "The U.S. Economy: What's Next?," Economics Strategic Analysis Archive sa_apr_07, Levy Economics Institute.
  8. Paul Davidson, 2008. "Is the current financial distress caused by the subprime mortgage crisis a Minsky moment? or is it the result of attempting to securitize illiquid noncommercial mortgage loans?," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 30(4), pages 669-676, July.
  9. Wynne Goldey & Marc Lavoie, 2007. "Fiscal policy in a stock-flow consistent (SFC) model," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 30(1), pages 79-100, October.
  10. L. Randall Wray & Eric Tymoigne, 2008. "Macroeconomics Meets Hyman P. Minsky: The Financial Theory of Investment," Economics Working Paper Archive wp_543, Levy Economics Institute.
  11. L. Randall Wray, 2008. "Financial Markets Meltdown: What Can We Learn from Minsky," Economics Public Policy Brief Archive ppb_94, Levy Economics Institute.
  12. Ryoo, Soon, 2010. "Long waves and short cycles in a model of endogenous financial fragility," Journal of Economic Behavior & Organization, Elsevier, vol. 74(3), pages 163-186, June.
  13. Lavoie, M, 1995. "Horizontalism, Structuralism, Liquidity Preference and the Principle of Increasing Risk," Working Papers 9513e, University of Ottawa, Department of Economics.
  14. Claudio H. Dos Santos & Gennaro Zezza, 2008. "A Simplified, 'Benchmark', Stock-Flow Consistent Post-Keynesian Growth Model," Metroeconomica, Wiley Blackwell, vol. 59(3), pages 441-478, 07.
  15. Jan Kregel, 2008. "Minsky’s Cushions of Safety: Systemic Risk and the Crisis in the U.S. Subprime Mortgage Market," Economics Public Policy Brief Archive ppb_93, Levy Economics Institute.
  16. Passarella Marco, 2010. "The Paradox of Tranquility Revisited. A Lotka-Volterra Model of the Financial Instability," Rivista italiana degli economisti, Società editrice il Mulino, issue 1, pages 69-104.
  17. Godley, Wynne, 1999. "Money and Credit in a Keynesian Model of Income Determination," Cambridge Journal of Economics, Oxford University Press, vol. 23(4), pages 393-411, July.
  18. Marc Lavoie & Wynne Godley, 2000. "Kaleckian Models of Growth in a Stock-Flow Monetary Framework: A Neo-Kaldorian Model," Economics Working Paper Archive wp_302, Levy Economics Institute.
  19. Wynne Godley, 1996. "Money, Finance and National Income Determination: An Integrated Approach," Economics Working Paper Archive wp_167, Levy Economics Institute.
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Cited by:
  1. Eugenio Caverzasi & Antoine Godin, 2013. "Stock-flow Consistent Modeling through the Ages," Economics Working Paper Archive wp_745, Levy Economics Institute.
  2. Passarella, Marco, 2011. "The two-price model revisited. A Minskian-Kaleckian reading of the process of 'financialization'," MPRA Paper 32033, University Library of Munich, Germany.
  3. Toshio Watanabe, 2013. "Net Worth Ratio and Financial Instability," Journal of Economic Structures, Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 2(1), pages 1-18, December.
  4. Mulligan, Robert F., 2013. "New evidence on the structure of production: Real and Austrian business cycle theory and the financial instability hypothesis," Journal of Economic Behavior & Organization, Elsevier, vol. 86(C), pages 67-77.
  5. Passarella, Marco, 2011. "From the village fair to Wall Street. The Italian reception of Minsky’s economic thought," MPRA Paper 49593, University Library of Munich, Germany.

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