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A contribution to the theory of financial fragility and crisis

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  • Amit Bhaduri

Abstract

The paper outlines formally three interrelated facets of a financial crisis of domestic origin: (i) a debt financed consumption boom supported by rising asset prices that ends in debt deflation; (ii) a related process of financial evolution of economic agents towards Ponzi finance; (iii) resulting systemic illiquidity afflicting the financial sector as a prelude to crisis. Being placed in relation to theories of exogenous and endogenous money, the models indicate how the co-evolution of the real and the financial sector results in financial fragility of different types. The paper explores formally the specific features of the fragility of various episode of crisis, which share a common pattern of gradual build up followed by a sudden collapse of financial confidence through the interaction between the real and the financial sector, and concludes with implications for policy. Copyright The Author 2011. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved., Oxford University Press.

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  • Amit Bhaduri, 2011. "A contribution to the theory of financial fragility and crisis," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 35(6), pages 995-1014.
    • Handle: RePEc:oup:cambje:v:35:y:2011:i:6:p:995-1014
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    File URL: http://hdl.handle.net/10.1093/cje/ber011
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    4. Pintu Parui, 2023. "Worker household debt, functional income distribution and growth: A neo‐Kaleckian perspective," Metroeconomica, Wiley Blackwell, vol. 74(2), pages 446-476, May.
    5. Engelbert Stockhammer & Rafael Wildauer, 2016. "Debt-driven growth? Wealth, distribution and demand in OECD countries," Cambridge Journal of Economics, Oxford University Press, vol. 40(6), pages 1609-1634.
    6. Hiroshi Nishi, 2019. "An empirical contribution to Minsky’s financial fragility: evidence from non-financial sectors in Japan," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 43(3), pages 585-622.
    7. Shan Xu & Lili Guo, 2023. "Financialization and Corporate Performance in China: Promotion or Inhibition?," Abacus, Accounting Foundation, University of Sydney, vol. 59(3), pages 776-817, September.
    8. Dilip M. Nachane, 2018. "The Global Crisis According to Post-Keynesians," India Studies in Business and Economics, in: Critique of the New Consensus Macroeconomics and Implications for India, chapter 0, pages 205-220, Springer.
    9. Shaukat Ansari, 2022. "Cash Transfers, International Finance and Neoliberal Debt Relations: The Case of Post‐apartheid South Africa," Development and Change, International Institute of Social Studies, vol. 53(3), pages 551-575, May.
    10. W A Jackson, 2015. "Markets and the Meaning of Flexibility," Economic Issues Journal Articles, Economic Issues, vol. 20(2), pages 45-65, September.
    11. Eugenio Caverzasi, 2012. "From the Financial Instability Hypothesis to the theory of Capital Market Inflation: a structural interpretation of the sub-prime crisis," DEM Working Papers Series 018, University of Pavia, Department of Economics and Management.
    12. Ruo-Yu Zhu & Ke-Hu Tan & Xiao-Hui Xin, 2023. "Can the Opening of High-Speed Railway Restrain Corporate Financialization?," Sustainability, MDPI, vol. 15(6), pages 1-23, March.
    13. Thomas Goda, 2017. "A comparative review of the role of income inequality in economic crisis theories and its contribution to the financial crisis of 2007-2009," Revista Finanzas y Politica Economica, Universidad Católica de Colombia, vol. 9(1), pages 151-174, February.
    14. Thomas Goda, 2013. "The role of income inequality in crisis theories and in the subprime crisis," Working Papers PKWP1305, Post Keynesian Economics Society (PKES).
    15. Greg Philip Hannsgen, 2021. "A Minimal Probabilistic Minsky Model: 3D Continuous-Jump Dynamics," Working Papers PKWP2026, Post Keynesian Economics Society (PKES).
    16. Yan, Xiang & Wang, Xuefang & Liu, Sheng, 2023. "A U-shaped relationship between real financialization and financial risk: Evidence from a single threshold model," Finance Research Letters, Elsevier, vol. 56(C).
    17. Gabe de Bondt, 2017. "Confidence and monetary policy transmission," EcoMod2017 10197, EcoMod.
    18. Francesco Ruggeri, 2021. "Household debt, aggregate demand, and instability in a Stock-Flow model," Working Papers 4/21, Sapienza University of Rome, DISS.
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