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The legal theory of finance and the financial instability hypothesis: Convergences and possible integration

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  • Marcos Reis
  • Daniel Vasconcelos

Abstract

This article presents the legal theory of finance (LTF) and compares it with the financial instability hypothesis (FIH), identifying points of convergence and divergence. The study aims to contribute to the literature by connecting these theories and provides the following main conclusions. First, the LTF incorporates aspects of the FIH, as the theories share several key elements, particularly the presence of fundamental uncertainty, the constraint of liquidity, and the necessity for governments to act as lenders of last resort. Second, the liquidity concept used in the LTF can be better comprehended with the use of Keynesian and post Keynesian literature on the topic. Third, the LTF aims to advance and update certain aspects of Minsky’s theory, particularly with regard to the globalization of markets, power relations, and the interdependencies of the political economy of finance. The study concludes that the theories are more complementary than divergent and future studies should create an analytical framework that integrates the theories’ most insightful aspects.

Suggested Citation

  • Marcos Reis & Daniel Vasconcelos, 2016. "The legal theory of finance and the financial instability hypothesis: Convergences and possible integration," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 39(2), pages 206-227, April.
  • Handle: RePEc:mes:postke:v:39:y:2016:i:2:p:206-227
    DOI: 10.1080/01603477.2016.1165622
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    References listed on IDEAS

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    1. Christine Sinapi, 2011. "Institutional Prerequisites of Financial Fragility within Minsky's Financial Instability Hypothesis: A Proposal in Terms of 'Institutional Fragility'," Economics Working Paper Archive wp_674, Levy Economics Institute.
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