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Institutional Prerequisites of Financial Fragility within Minsky's Financial Instability Hypothesis: A Proposal in Terms of 'Institutional Fragility'

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  • Christine Sinapi

Abstract

The relevancy of Minsky's Financial Instability Hypothesis (FIH) in the current (and still unfolding) crisis has been clearly acknowledged by both economists and regulators. While most papers focus on discussing to what extent the FIH or Minsky's Big Bank/Big Government interpretation is appropriate to explain and sort out the crisis, some authors have also emphasized the need to consider the institutional foundations of Minsky's work (Whalen 2007, Wray 2008, Dimsky 2010). The importance of institutions within the FIH was strongly emphasized by Minsky himself, who assigned them the function of constraining the development of financial fragility. Yet only limited literature has focused on the institutional aspects on Minsky's FIH. The reason for this may be that they were mainly dealt with by Minsky in his latest papers, and they have remained, to some extent, incomplete, unclear, and even ambiguous. In our view, a synthesis of Minsky's proposals, along with a clarification and theoretical justification, remains to be done. Our objective in this paper is to contribute to this theoretical project. It leads us to propose that the notion of "institutional fragility" can constitute a useful perspective to complement and justify the endogenous development of financial fragility within the FIH. Eventually, this view may contribute to the debate about international financial governance.

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Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_674.

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Date of creation: Jul 2011
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Handle: RePEc:lev:wrkpap:wp_674

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Keywords: Financial Crisis; Financial Fragility; Institutional Fragility; International Financial Governance;

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  1. Hyman P. Minsky & Charles J. Whalen, 1997. "Economic Insecurity and the Institutional Prerequisites for Successful Capitalism," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., M.E. Sharpe, Inc., vol. 19(2), pages 155-170, January.
  2. Piero Ferri & Hyman P. Minsky, 1991. "Market Processes and Thwarting Systems," Economics Working Paper Archive, Levy Economics Institute wp_64, Levy Economics Institute.
  3. Dimitri Papadimitriou & L. Randall Wray, 1998. "The Economic Contributions of Hyman Minsky: varieties of capitalism and institutional reform," Review of Political Economy, Taylor & Francis Journals, Taylor & Francis Journals, vol. 10(2), pages 199-225.
  4. Gary A. Dymski, 2010. "Why the subprime crisis is different: a Minskyian approach," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 34(2), pages 239-255, March.
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  6. Commons, John R., 1931. "Institutional Economics," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, McMaster University Archive for the History of Economic Thought, vol. 21, pages 648-657.
  7. Hyman P. Minsky, 1998. "Uncertainty and the Institutional Structure of Capitalist Economies," Macroeconomics, EconWPA 9809015, EconWPA.
  8. Machiko Nissanke & Howard Stein, 2003. "Financial Globalization and Economic Development: Toward an Institutional Foundation," Eastern Economic Journal, Eastern Economic Association, vol. 29(2), pages 287-308, Spring.
  9. Eric Nasica, 1997. "Comportements bancaires et fluctuations économiques: l'apport fondamental d'H.P. Minsky à la théorie des cycles endogènes et financiers," Post-Print, HAL halshs-00466545, HAL.
  10. Philip Arestis & Machiko Nissanke & Howard Stein, 2003. "Finance and Development: Institutional and Policy Alternatives to Financial Liberalization," Economics Working Paper Archive, Levy Economics Institute wp_377, Levy Economics Institute.
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  12. Domenico Delli Gatti & Mauro Gallegati & Hyman P. Minsky, 1999. "Financial Institutions, Economic Policy, and the Dynamic Behavior of the Economy," Macroeconomics, EconWPA 9903009, EconWPA.
  13. Philip Arestis, 2002. "Financial crisis in Southeast Asia: dispelling illusion the Minskyan way," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 26(2), pages 237-260, March.
  14. L. Randall Wray, 2007. "Lessons from the Subprime Meltdown," Economics Working Paper Archive, Levy Economics Institute wp_522, Levy Economics Institute.
  15. Hyman P. Minsky, 1992. "The Financial Instability Hypothesis," Economics Working Paper Archive, Levy Economics Institute wp_74, Levy Economics Institute.
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