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A simple model of Minsky’s Financial Instability Hypothesis

Author

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  • Armando Álvarez

    (Department of Economics, Trinity College, USA)

Abstract

This paper develops a simple and teachable shifting equilibrium model of Minsky's Financial Instability Hypothesis by integrating a benchmark post-Keynesian model of endogenous money with Minsky's own ideas of the introduction of money through credit, the profit-seeking behavior of the banking sector, and his classification of financial postures. The paper highlights how financial crises are intrinsically connected to economic decisions made under fundamental uncertainty that Minsky, following Keynes, considered inherent in capitalism. The model focuses on credit-financed investment decisions by non-financial firms and the corresponding lending by profit-seeking banks. The paper introduces a ratio of Ponzi-speculative to hedge units, which connects the macroeconomic outcome with the micro classification of individual firms according to Minsky's financial postures.

Suggested Citation

  • Armando Álvarez, 2026. "A simple model of Minsky’s Financial Instability Hypothesis," Working Papers 2611, New School for Social Research, Department of Economics.
    • Handle: RePEc:new:wpaper:2611
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    Keywords

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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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