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A Perspective on Minsky Moments: Revisiting the Core of the Financial Instability Hypothesis

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  • Alessandro Vercelli
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    Abstract

    This paper aims to bridge the gap between theory and facts on the so-called 'Minsky moments' by revisiting the financial instability hypothesis (FIH). We limit the analysis to the core of the FIH, that is, to its strictly financial part. The approach suggested here builds on Minsky's contributions revisited in the light of the subprime mortgage financial crisis. We start from a constructive criticism of the well-known Minskyan taxonomy of economic units (hedge, speculative, and Ponzi), and suggest a different approach that allows a continuous measure of the units' financial conditions. We use this alternative approach to account for the cyclical fluctuations of financial conditions that endogenously generate instability and fragility. We may thus suggest a precise definition of a Minsky moment as the starting point of a Minsky process, the phase of a financial cycle when many economic units suffer from both liquidity and solvency problems. Although the approach sketched here is very simple and requires extensions in many directions, we may draw from it a few policy insights on how to mitigate the financial cycle.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/09538259.2011.526293
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Review of Political Economy.

    Volume (Year): 23 (2011)
    Issue (Month): 1 ()
    Pages: 49-67

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    Handle: RePEc:taf:revpoe:v:23:y:2011:i:1:p:49-67

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Sordi, Serena & Vercelli, Alessandro, 2006. "Financial fragility and economic fluctuations," Journal of Economic Behavior & Organization, Elsevier, vol. 61(4), pages 543-561, December.
    2. 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.
    3. Charles Whalen, 2008. "Understanding the Credit Crunch as a Minsky Moment," Challenge, M.E. Sharpe, Inc., vol. 51(1), pages 91-109, January.
    4. Jan Toporowski, 2008. "Minsky's 'induced investment and business cycles'," Cambridge Journal of Economics, Oxford University Press, vol. 32(5), pages 725-737, September.
    5. Philip Arestis, 2002. "Financial crisis in Southeast Asia: dispelling illusion the Minskyan way," Cambridge Journal of Economics, Oxford University Press, vol. 26(2), pages 237-260, March.
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    Cited by:
    1. Serena Sordi & Alessandro Vercelli, 2010. "Heterogeneous expectations and strong uncertainty in a Minskyian model of financial fluctuations," Department of Economic Policy, Finance and Development (DEPFID) University of Siena 1010, Department of Economic Policy, Finance and Development (DEPFID), University of Siena.
    2. Giansante, Simone & Chiarella, Carl & Sordi, Serena & Vercelli, Alessandro, 2012. "Structural contagion and vulnerability to unexpected liquidity shortfalls," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 558-569.
    3. Marco, Passarella, 2011. "A simplified stock-flow consistent dynamic model of the systemic financial fragility in the 'New Capitalism'," MPRA Paper 28499, University Library of Munich, Germany.
    4. 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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