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Measuring Macroprudential Risk through Financial Fragility: A Minskyan Approach

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  • Eric Tymoigne
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    Abstract

    This paper presents a method to capture the growth of financial fragility within a country and across countries. This is done by focusing on housing finance in the United States, the United Kingdom, and France. Following the theoretical framework developed by Hyman P. Minsky, the paper focuses on the risk of amplification of shock via a debt deflation instead of the risk of a shock per se. Thus, instead of focusing on credit risk, for example, financial fragility is defined in relation to the means used to service debts, given credit risk and all other sources of shocks. The greater the expected reliance on capital gains and debt refinancing to meet debt commitments, the greater the financial fragility, and so the higher the risk of debt deflation induced by a shock if no government intervention occurs. In the context of housing finance, this implies that the growth of subprime lending was not by itself a source of financial fragility; instead, it was the change in the underwriting methods in all sectors of the mortgage markets that created a financial situation favorable to the emergence of a debt deflation. Stated alternatively, when nonprime and prime mortgage lending moved to asset-based lending instead of income-based lending, the financial fragility of the economy grew rapidly.

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    Bibliographic Info

    Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_716.

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    Date of creation: Apr 2012
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    Handle: RePEc:lev:wrkpap:wp_716

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

    Related research

    Keywords: Debt Deflation; Minsky; Financial Fragility; Systemic Risk;

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    1. Oriol Aspachs & Charles A.E. Goodhart & Dimitrios P. Tsomocos & Lea Zicchino, 2006. "Towards a Measure of Financial Fragility," OFRC Working Papers Series, Oxford Financial Research Centre 2006fe04, Oxford Financial Research Centre.
    2. Yasushi Suzuki, 2005. "Uncertainty, financial fragility and monitoring: Will Basle-type pragmatism resolve the Japanese banking crisis?," Review of Political Economy, Taylor & Francis Journals, Taylor & Francis Journals, vol. 17(1), pages 45-61.
    3. Luiz Fernando R. De Paula & Antonio José Alves, Jr., 2000. "External Financial Fragility and the 1998-1999 Brazilian Currency Crisis," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., M.E. Sharpe, Inc., vol. 22(4), pages 589-617, July.
    4. L. Randall Wray, 2009. "The rise and fall of money manager capitalism: a Minskian approach," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 33(4), pages 807-828, July.
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    Cited by:
    1. Ramsay, Bruce A. & Sarlin, Peter, 2014. "Ending over-lending: Assessing systemic risk with debt to cash flow," Research Discussion Papers, Bank of Finland 11/2014, Bank of Finland.

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