A Perspective on Minsky Moments: Revisiting the Core of the Financial Instability Hypothesis

This paper aims to bridge the gap between theory and facts on the so-called 'Minsky moments' by revisiting the financial instability hypothesis (FIH). We limit the analysis to the core of the FIH, that is, to its strictly financial part. The approach suggested here builds on Minsky's contributions revisited in the light of the subprime mortgage financial crisis. We start from a constructive criticism of the well-known Minskyan taxonomy of economic units (hedge, speculative, and Ponzi), and suggest a different approach that allows a continuous measure of the units' financial conditions. We use this alternative approach to account for the cyclical fluctuations of financial conditions that endogenously generate instability and fragility. We may thus suggest a precise definition of a Minsky moment as the starting point of a Minsky process, the phase of a financial cycle when many economic units suffer from both liquidity and solvency problems. Although the approach sketched here is very simple and requires extensions in many directions, we may draw from it a few policy insights on how to mitigate the financial cycle.