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Macroeconomics Meets Hyman P. Minsky: The Financial Theory of Investment

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  • L. Randall Wray
  • Eric Tymoigne

Abstract

Expanding on an approach developed by financial economist Hyman Minsky, the authors of this new working paper present an alternative to the standard "efficient markets hypothesis"--the relevance of which Minsky vehemently denied. Minsky recognized that, in a modern capitalist economy with complex, expensive, and long-lived assets, the method used to finance asset positions is of critical importance, both for theory and for real-world outcomes—one reason his alternate approach has been embraced by Post Keynesian economists and Wall Street practitioners alike. Coauthors L. Randall Wray and Eric Tymoigne argue that the current financial crisis, which began with the collapse of the U.S. subprime mortgage market in 2007, provides a compelling reason to show how Minsky's approach offers us a solid grounding in the workings of financial capitalism. They examine Minsky's extension to Keynes's investment theory of the business cycle, which allowed Minsky to analyze the evolution, over time, of the modern capitalist economy toward fragility--what is well known as his financial instability hypothesis. They then update Minsky's approach to finance with a more detailed examination of asset pricing and the evolution of the banking sector, and conclude with a brief review of the insights that such an approach can provide for analysis of the current global financial crisis.

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Bibliographic Info

Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_543.

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Date of creation: Sep 2008
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Handle: RePEc:lev:wrkpap:wp_543

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Web page: http://www.levyinstitute.org

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Cited by:
  1. Carl Chiarella & Corrado Di Guilmi, 2010. "The Financial Instability Hypothesis:a Stochastic Microfoundation Framework," Research Paper Series 273, Quantitative Finance Research Centre, University of Technology, Sydney.
  2. Passarella, Marco, 2012. "A simplified stock-flow consistent dynamic model of the systemic financial fragility in the ‘New Capitalism’," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 570-582.
  3. Sunanda Sen, 2011. "The Global Crisis and the Remedial Actions: A Nonmainstream Perspective," Economics Working Paper Archive wp_677, Levy Economics Institute.
  4. Ognjen Radonjić & Miodrag Zec, 2010. "Subprime Crisis and Instability of Global Financial Markets," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 57(2), pages 209-224, June.
  5. Sheila Dow, 2009. "History of Thought and Methodology in Pluralist Economics Education," International Review of Economic Education, Economics Network, University of Bristol, vol. 8(2), pages 41-57.
  6. Detzer, Daniel, 2012. "New instruments for banking regulation and monetary policy after the crisis," IPE Working Papers 13/2012, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
  7. Leszek Kąsek & Marek Lubiński, 2010. "hyman," Contemporary Economics, University of Finance and Management in Warsaw, vol. 4(1), March.
  8. Marco, Passarella, 2011. "Systemic financial fragility and the monetary circuit: a stock-flow consistent approach," MPRA Paper 28498, University Library of Munich, Germany.

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