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Minsky Financial Instability, Interscale Feedback, Percolation and Marshall-Walras Disequilibrium

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  • Sorin Solomon

    (Racah Institute of Physics, Hebrew University)

  • Natasa Golo

    (Racah Institute of Physics, Hebrew University)

Abstract

We study analytically and numerically Minsky instability as a combination of top-down, bottom-up and peer-to-peer positive feedback loops. The peer-to-peer interactions are represented by the links of a network formed by the connections between firms, contagion leading to avalanches and percolation phase transitions propagating across these links. The global parameter in the top-bottom, bottom-up feedback loop is the interest rate. Before the Minsky moment, in the Minsky Loans Accelerator stage, the relevant bottom parameter representing the individual firms micro-states is the quantity of loans. After the Minsky moment, in the Minsky Crisis Accelerator stage, the relevant bottom parameters are the number of ponzi units / quantity of failures, defaults. We represent the top-bottom, bottom-up interactions on a plot similar to the Marshal-Walras diagram for quantity-price market equilibrium (where the interest rate is the analog of the price). The Minsky instability is then simply emerging as a consequence of the fixed point (the intersection of the supply and demand curves) being unstable (repulsive). In the presence of network effects, one obtains more than one fixed point and a few dynamic regimes (phases). We describe them and their implications for understanding, predicting and steering economic instability.

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Paper provided by arXiv.org in its series Papers with number 1402.0176.

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Date of creation: Feb 2014
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Publication status: Published in Accounting, Economics and Law. Volume 3, Issue 3, Pages 167-260, 2013
Handle: RePEc:arx:papers:1402.0176

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Cited by:
  1. Sorin Solomon & Natasa Golo, 2014. "Microeconomic Structure determines Macroeconomic Dynamics. Aoki defeats the Representative Agent," Papers 1401.7496, arXiv.org.

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