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A simplified stock-flow consistent dynamic model of the systemic financial fragility in the 'New Capitalism'

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  • Marco, Passarella

Abstract

In the last few years, many financial analysts and heterodox economists (but even some ‘dissenters’ among orthodox economists) have referred to the contribution of Hyman P. Minsky as fundamental to understanding the current crisis. However, it is well-known that the traditional formulation of Minsky’s ‘financial instability hypothesis’ shows serious internal logical problems. Furthermore, Minsky’s analysis of capitalism must be updated on the basis of the deep changes which, during the last three decades, have concerned the world economy. In order to overcome these theoretical and empirical troubles, this paper, first, introduces the reader to the ‘mechanics’ of the financial instability theory, according to the formulation of the traditional Minskian literature (section 2). Second, it shows ‘why’ Minsky’s theory cannot be regarded as a general theory of the business cycle (section 3). Third, the paper attempts to supply a simplified, but consistent, re-formulation of Minsky’s theory by inter-breeding it with inputs coming from the ‘New Cambridge’ theories and the current ‘formal Minskian literature’. The aim of this is to analyze the impact of both capital-asset inflation and consumer credit on the financial ‘soundness’ of the non-financial business sector (sections 4-7). Some concluding remarks are provided in the last part of the paper (section 8).

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28499.

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Date of creation: 19 Jan 2011
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Handle: RePEc:pra:mprapa:28499

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Keywords: Financial Instability; Stock-Flow Consistency; Capital-asset Inflation;

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  1. Jan Kregel, 2008. "Minsky’s Cushions of Safety: Systemic Risk and the Crisis in the U.S. Subprime Mortgage Market," Economics Public Policy Brief Archive ppb_93, Levy Economics Institute.
  2. Marc Lavoie & Wynne Godley, 2000. "Kaleckian Models of Growth in a Stock-Flow Monetary Framework: A Neo-Kaldorian Model," Economics Working Paper Archive wp_302, Levy Economics Institute.
  3. Wynne Godley & Dimitri B. Papadimitriou & Gennaro Zezza, 2007. "The U.S. Economy: What's Next?," Economics Strategic Analysis Archive sa_apr_07, Levy Economics Institute.
  4. Lavoie, M. & Seccareccia, M., 1999. "Minsky's Financial Fragility Hypothesis: a Missing Macroeconomic Link?," Working Papers 9904e, University of Ottawa, Department of Economics.
  5. Paul Davidson, 2008. "Is the current financial distress caused by the subprime mortgage crisis a Minsky moment? or is it the result of attempting to securitize illiquid noncommercial mortgage loans?," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 30(4), pages 669-676, July.
  6. Passarella Marco, 2010. "The Paradox of Tranquility Revisited. A Lotka-Volterra Model of the Financial Instability," Rivista italiana degli economisti, Società editrice il Mulino, issue 1, pages 69-104.
  7. Marco PASSARELLA, 2010. "The Paradox of Tranquility Revisited. A Lotka-Volterra Model of the Financial Instability," Rivista Italiana degli Economisti, SIE - Societa' Italiana degli Economisti (I), vol. 15(1), pages 69-104, April.
  8. L. Randall Wray & Eric Tymoigne, 2008. "Macroeconomics Meets Hyman P. Minsky: The Financial Theory of Investment," Economics Working Paper Archive wp_543, Levy Economics Institute.
  9. Piero Ferri & Hyman P. Minsky, 1991. "Market Processes and Thwarting Systems," Economics Working Paper Archive wp_64, Levy Economics Institute.
  10. Soon Ryoo, 2009. "Long waves and short cycles in a model of endogenous financial fragility," UMASS Amherst Economics Working Papers 2009-03, University of Massachusetts Amherst, Department of Economics.
  11. Wynne Goldey & Marc Lavoie, 2007. "Fiscal policy in a stock-flow consistent (SFC) model," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 30(1), pages 79-100, October.
  12. Alessandro Vercelli, 2011. "A Perspective on Minsky Moments: Revisiting the Core of the Financial Instability Hypothesis," Review of Political Economy, Taylor & Francis Journals, vol. 23(1), pages 49-67.
  13. Godley, Wynne, 1999. "Money and Credit in a Keynesian Model of Income Determination," Cambridge Journal of Economics, Oxford University Press, vol. 23(4), pages 393-411, July.
  14. Claudio H. Dos Santos & Gennaro Zezza, 2008. "A Simplified, 'Benchmark', Stock-Flow Consistent Post-Keynesian Growth Model," Metroeconomica, Wiley Blackwell, vol. 59(3), pages 441-478, 07.
  15. Graziani,Augusto, 2003. "The Monetary Theory of Production," Cambridge Books, Cambridge University Press, number 9780521812115, October.
  16. Lavoie, M, 1995. "Horizontalism, Structuralism, Liquidity Preference and the Principle of Increasing Risk," Working Papers 9513e, University of Ottawa, Department of Economics.
  17. Jan Toporowski, 2008. "Minsky's 'induced investment and business cycles'," Cambridge Journal of Economics, Oxford University Press, vol. 32(5), pages 725-737, September.
  18. L. Randall Wray, 2008. "Financial Markets Meltdown: What Can We Learn from Minsky," Economics Public Policy Brief Archive ppb_94, Levy Economics Institute.
  19. Wynne Godley, 1996. "Money, Finance and National Income Determination: An Integrated Approach," Economics Working Paper Archive wp_167, Levy Economics Institute.
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Cited by:
  1. Eugenio Caverzasi & Antoine Godin, 2013. "Stock-flow Consistent Modeling through the Ages," Economics Working Paper Archive wp_745, Levy Economics Institute.
  2. Toshio Watanabe, 2013. "Net Worth Ratio and Financial Instability," Journal of Economic Structures, Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 2(1), pages 1-18, December.
  3. Mulligan, Robert F., 2013. "New evidence on the structure of production: Real and Austrian business cycle theory and the financial instability hypothesis," Journal of Economic Behavior & Organization, Elsevier, vol. 86(C), pages 67-77.
  4. Passarella, Marco, 2011. "The two-price model revisited. A Minskian-Kaleckian reading of the process of 'financialization'," MPRA Paper 32033, University Library of Munich, Germany.
  5. Passarella, Marco, 2011. "From the village fair to Wall Street. The Italian reception of Minsky’s economic thought," MPRA Paper 49593, University Library of Munich, Germany.

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