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Minsky Financial Instability, Interscale Feedback, Percolation and Marshall–Walras Disequilibrium

Listed author(s):
  • Solomon Sorin

    ()

  • Golo Natasa

    ()

    (Racah Institute of Physics, Hebrew University Jerusalem, Jerusalem, Israel)

We study analytically and numerically Minsky instability as a combination of top–down, bottom–up and peer-to-peer positive feedback loops. The peer-to-peer interactions are represented by the links of a network formed by the connections between firms; contagion leading to avalanches and percolation phase transitions propagating across these links. The global parameter in the top–bottom – bottom–up feedback loop is the interest rate. Before the Minsky Moment, in the “Minsky loans accelerator” stage the relevant “bottom” parameter representing the individual firms’ micro-states is the quantity of loans. After the Minsky Moment, in the “Minsky crisis accelerator” stage, the relevant “bottom” parameters are the number of ponzi units/quantity of failures/defaults. We represent the top–bottom, bottom–up interactions on a plot similar to the Marshall–Walras diagram for quantity-price market equilibrium (where the interest rate is the analog of the price). The Minsky instability is then simply emerging as a consequence of the fixed point (the intersection of the supply and demand curves) being unstable (repulsive). In the presence of network effects, one obtains more than one fixed point and a few dynamic regimes (phases). We describe them and their implications for understanding, predicting and steering economic instability.

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Article provided by De Gruyter in its journal Accounting, Economics, and Law.

Volume (Year): 3 (2013)
Issue (Month): 3 (October)
Pages: 167-260

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Handle: RePEc:bpj:aelcon:v:3:y:2013:i:3:p:167-260:n:4
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