Measuring Macroprudential Risk through Financial Fragility: A Minskyan Approach
AbstractThis 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 InfoPaper provided by Levy Economics Institute, The in its series Economics Working Paper Archive with number wp_716.
Date of creation: Apr 2012
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Debt Deflation; Minsky; Financial Fragility; Systemic Risk;
Find related papers by JEL classification:
- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-08 (All new papers)
- NEP-BAN-2012-05-08 (Banking)
- NEP-MAC-2012-05-08 (Macroeconomics)
- NEP-PKE-2012-05-08 (Post Keynesian Economics)
- NEP-RMG-2012-05-08 (Risk Management)
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.:
- Lea Zicchino & Dimitrios Tsomocos & Charles Goodhart & Oriol Aspachs Bracon, 2006.
"Towards a Measure of Financial Fragility,"
FMG Discussion Papers
dp554, Financial Markets Group.
- Dimitrios P Tsomocos, 2006. "Towards a Measure of Financial Fragility," Economics Series Working Papers 2006-FE-04, University of Oxford, Department of Economics.
- Oriol Aspachs & Charles A.E. Goodhart & Dimitrios P. Tsomocos & Lea Zicchino, 2006. "Towards a Measure of Financial Fragility," OFRC Working Papers Series 2006fe04, Oxford Financial Research Centre.
- L. Randall Wray, 2009. "The rise and fall of money manager capitalism: a Minskian approach," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 807-828, July.
- Yasushi Suzuki, 2005. "Uncertainty, financial fragility and monitoring: Will Basle-type pragmatism resolve the Japanese banking crisis?," Review of Political Economy, Taylor and Francis Journals, vol. 17(1), pages 45-61.
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