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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, Oxford University Press, 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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    Cited by:

    1. Thomas Goda, 2013. "The role of income inequality in crisis theories and in the subprime crisis," Working Papers PKWP1305, Post Keynesian Economics Study Group (PKSG).
    2. Eugenio Caverzasi & Antoine Godin, 2013. "Stock-flow Consistent Modeling through the Ages," Economics Working Paper Archive wp_745, Levy Economics Institute.
    3. Toichiro Asada, 2012. "Modeling financial instability," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 9(2), pages 215-232.
    4. W A Jackson, 2015. "Markets and the Meaning of Flexibility," Economic Issues Journal Articles, Economic Issues, vol. 20(2), pages 45-65, September.
    5. 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.
    6. Alberto Botta & Eugenio Caversazi & Daniele Tori, 2016. "The macroeconomics of shadow banking," Working Papers PKWP1611, Post Keynesian Economics Study Group (PKSG).
    7. Hiroshi Nishi, 2016. "An empirical contribution to Minsky’s financial fragility:Evidence from non-financial sectors in Japan," Discussion papers e-16-007, Graduate School of Economics , Kyoto University.
    8. 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 POLÍTICA ECONÓMICA, UNIVERSIDAD CATOLICA DE COLOMBIA, vol. 9(1), pages 151-174, February.

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