Stabilization policies and banking behaviors: a rereading of Minsky's conception of business cycles

The aim of this paper is to add to current debates on the efficiency of economic stabilization policies through an analysis of the conception of business cycles developed by Minsky in his earliest work at the end of the 1950s. The argument is developed in three steps. First, how Minsky's conception of business cycles is influenced by the nonlinear models with floors and ceilings developed by Hicks in the 1950s is discussed. These models provide a relevant theoretical framework for Minskyan analysis of stabilization policies which act as 'thwarting systems' and whose purpose is to counteract and contain the naturally explosive amplitude of economic fluctuations. They allow a better understanding of his theory of financial instability. Contrary to the generally widespread interpretation, the Minskyan Financial Instability Hypothesis cannot be reduced to an endogenous and financial conception of economic fluctuations founded only on the behavior of private economic agents: public authorities, through their stabilization policies, also play a central role in explaining the form of business cycles (Section 2). Second, the central role played by banks in Minsky's analysis of fluctuations is highlighted. We emphasize that the behavior of banks is guided essentially by a permanent quest for profit opportunities in the tradition of such authors as Tobin and Schumpeter. This feature is crucial for understanding Minsky's conception of business cycles since it provides an explanation for how banks' behaviors undermine the efficiency of stabilization policies, and therefore the form of economic fluctuations (Section 3). The third step (Section 4) is an assessment of the relevance of Minsky's approach for understanding recent pre- and post-crisis stabilization policies.