Minsky "Financial Instability Hypothesis"
Does Minsky’s ‘financial instability hypothesis’ provide a useful explanation of the global financial crisis? Does it suggest possible policy action to respond to or prevent crisis?
The striking expansion of international finance and increased interdependence has risen the role of volatility in financial system and following the threats of a financial crisis.
This paper seeks to provide Minsky’s explanation of current crisis. It addresses the question “to what extent Minsky’s ‘financial instability hypothesis’ provide a useful analysis of global financial crisis and its measurement, and does it provide useful measurements?”
This paper agrees on Minsky’s idea that financial regulation is necessary to ensure economic stability, and argues his insights are helpful in understanding nature of financial crisis although it does not explain completely and adequately.
In addition to this introduction section, this paper includes six sections. The first section provides a changing finance environment in modern era which suits Minsky’s theory and offers a practical elements and background. The second and third explores Minsky’s financial instability hypothesis to explain the fragility and instability of financial system which building on the income-debt analysis in financial behaviour system. The second part analysis the income-debt flow As the invest expansion behaviour develops, optimistic expectation increase, the attitudes about proper level of debt and risk change, then financial system becomes increasingly fragile (Minsky, 1992). The third part gives a second look at Minsky’s income-debt relations to explain why financial crisis still occur under normal operations due to its inherent irrational expectations, actors’ inability to repay the future money in cash flows, not unusual events, and the development of financial fragility. The forth illustrates some limitation of Minsky’s ‘financial instability hypothesis’ in explaining financial crisis. The fifth
The striking expansion of international finance and increased interdependence has risen the role of volatility in financial system and following the threats of a financial crisis.
This paper seeks to provide Minsky’s explanation of current crisis. It addresses the question “to what extent Minsky’s ‘financial instability hypothesis’ provide a useful analysis of global financial crisis and its measurement, and does it provide useful measurements?”
This paper agrees on Minsky’s idea that financial regulation is necessary to ensure economic stability, and argues his insights are helpful in understanding nature of financial crisis although it does not explain completely and adequately.
In addition to this introduction section, this paper includes six sections. The first section provides a changing finance environment in modern era which suits Minsky’s theory and offers a practical elements and background. The second and third explores Minsky’s financial instability hypothesis to explain the fragility and instability of financial system which building on the income-debt analysis in financial behaviour system. The second part analysis the income-debt flow As the invest expansion behaviour develops, optimistic expectation increase, the attitudes about proper level of debt and risk change, then financial system becomes increasingly fragile (Minsky, 1992). The third part gives a second look at Minsky’s income-debt relations to explain why financial crisis still occur under normal operations due to its inherent irrational expectations, actors’ inability to repay the future money in cash flows, not unusual events, and the development of financial fragility. The forth illustrates some limitation of Minsky’s ‘financial instability hypothesis’ in explaining financial crisis. The fifth
Bibliography: Books: Minsky, H.P., 1982, Can “it” Happen Again? Essays on Instability and Finance, Armonk, New York: M.E Minsky, H.P., 1986, Stabilizing an unstable Economy, New Haven: Yale University Press, pp171-220 Edit Books: Journals articles: Palley, T.I., 2010, ‘The Limits of Minsky 's Financial Instability Hypothesis as an Explanation of the Crisis’, Monthly Review, Vol.61, No Wolfson, M.H., 2002, “Minsky’s Theory of Financial Crises in a Global Context, Journal of Economic Issues”, Vol 34, No.2, pp 393-400 Working Paper Online: Minsky, H. P., 1992, “The Financial Instability Hypothesis,” May 1992, Working Paper no. 74, New York: Levy Economics Institute of Bard College, accessible on 10th May, 2013 【online address】:http://www.levyinstitute.org/pubs/wp74.pdf