Structural financial instability and cyclical fluctuations (original) (raw)

Financial fragility and economic fluctuations

Journal of Economic Behavior & Organization, 2006

This paper proposes a simple prototype model that describes the complex dynamics of a sophisticated monetary economy. The interaction between the current and intertemporal financial constraints of economic units brings about irregular fluctuations at the micro and macro levels. By means of qualitative dynamic analysis and numerical simulations, we reformulate in more operational terms, and extend in a number of new directions, the model suggested recently by one of the authors (Vercelli, 2000) to study the interaction between financial fragility, modelled in terms of structural instability, and dynamically unstable financial fluctuations.

Financial Fragility and Economic Fluctuations: Numerical Simulations and Policy Implications

Department of Economics University of Siena, 2003

Minsky, Keynes and the structural instability of a sophisticated monetary economy

Financial Fragility and Investment in the Capitalist Economy, 2001

This paper argues that both Keynes and Minsky held a concept of financial instability which may be properly understood only in terms of structural instability, and not-as is usual-in terms of the traditional concept of economic instability, i.e. dynamic instability. Keynes is quite explicit in denying that the dynamic instability of a monetary economy is a particularly serious problem; on the contrary, he claims that the crucial troubles are induced by discontinuous and unpredictable shifts of the two crucial financial functions of his heuristic model (the liquidity preference and the marginal efficiency of capital curves) which cannot be satisfactorily interpreted in terms of dynamic instability but only in terms of structural instability. Analogously the Minsky's crucial concept of financial fragility which plays a crucial role in his theory of economic cycles has to be interpreted in terms of structural instability. The endogenous shifts of the degree of financial fragility which explain many basic features of economic cycles are best interpreted as fluctuations in the degree of structural instability of a sophisticated monetary economy. The shift of emphasis from the usual concept of dynamic instability to the innovative one of structural instability has far-reaching implications for economic theory and policy which are briefly analysed in the paper.

Monetary Policy Rules with Financial Instability

2008

Abstract To provide a rigorous analysis of monetary policy in the face of financial instability, we extend the standard dynamic stochastic general equilibrium model to include a financial system. Our simulations suggest that if financial instability affects output and inflation with a lag, and if the central bank has privileged information about credit risk, monetary policy responding instantly to increased credit risk can trade off more output and inflation instability today for a faster return to the trend than a policy that follows the simple Taylor rule.

Special Symposium on »Financial instability and crisis«

European Journal of Economics and Economic Policies: Intervention, 2009

In early August 2009 the 2 nd Summer School of the Research Network Macroeconomics and Macroeconomic Policies (FMM) was held in Berlin. As in the previous year, about 50 graduate students, young researchers and senior lecturers from all over the world came together to discuss »Keynesian Macroeconomics and European Economic Policies«. In response to current macroeconomic events, a panel discussion was organised, in which the global economic crisis and the prospects for alternative macroeconomic theories were debated. Th e participants in the panel debate were asked to provide written answers to some of the questions discussed in Berlin. Th ese answers are documented below. Th e questions were asked by Till van Treeck from the Macroeconomic Policy Institute (IMK) in the Hans Boeckler Foundation in Duesseldorf.

Banking crises and financial instability: Empirical and historical lessons

Banks and Bank Systems, 2021

The paper examines the importance of financial instability for the development of four Norwegian banking crises. The crises are the Post First World War Crisis during the early 1920s, the mid 1920s Monetary Crisis, the Great Depression in the 1930s, and the Scandinavian Banking Crisis of 1987–1993. The paper first offers a description of the financial instability hypothesis applied by Minsky and Kindleberger, and in a recent dynamic financial crisis model. Financial instability is defined as a lack of financial markets and institutions that provide capital and liquidity at a sustainable level under stress. Financial instability basically evolves during times of overheating, overspending and extended credit granting. This is most common during significant booms. The process has devastating effects after markets have turned into a state of negative development.The paper tests the validity of the financial instability hypothesis using a quantitative structural time series model. It rev...

Financial Instability Hypothesis and Macroeconomic Stabilization: How Should Government React In Times of Crisis

In times of crisis it is essential that some form of stabilization mechanism be put in place to check the abnormal trends in the economy. Governments and Central bank often result to different regimes of macroeconomic stabilization to stabilize and re-energize the economy. This study reviews Minsky's Financial Market Instability Hypothesis and re-evaluates the recommendations in the work of Minsky necessary for the stabilization of the economy. It is expected to provide further insight on the relevance of current recommendations in the macroeconomic stabilization process and restart the open ended argument of the process of responding to crisis in the future.

TOWARDS A TYPOLOGY FOR SYSTEMIC FINANCIAL INSTABILITY

This article seeks to provide a categorisation of events of systemic financial instability that have been experienced in recent decades, seeking to draw out common elements from these seemingly-diverse events. We maintain that despite the apparent diversity of events of financial instability, a useful summary categorisation is between bank, market-price and market-liquidity based crises. There are important subcategories of each type, such as domestic versus international, currency crisis linked, single-institution based, equity-related, property, commodities, deregulation and disintermediation linked crises. Such financial crises are usefully examined in the light of the theories of financial instability, not least to illuminate common generic patterns that can be helpful in macroprudential surveillance. We derive a framework for analysing the evolution of such crises, highlighting that it is vulnerability of a financial system that is the key common element to a crisis, besides the nature of propagation of a crisis to the wider economy. Besides having general applicability, notably to OECD countries, the typology and generic features have some relevant implications for euro area countries. Development of securities markets, the likelihood of regional crises and the likely impact of ageing are among aspects that warrant vigilance by policy makers in the euro zone.

Macroeconomic Stabilization Policies in Intrinsically Unstable Macroeconomies

Studies in Nonlinear Dynamics & Econometrics, 2000

Many monetary and fiscal policy measures have aimed at mitigating the effects of the financial market meltdown that started in the U.S. subprime sector in 2008 and has subsequently spread world wide as a great recession. Slowly some recovery appears to be on the horizon, yet it is worthwhile exploring the fragility and potentially destabilizing feedbacks of advanced macroeconomies in the context of a framework that builds on the ideas of Keynes and Tobin. This framework stresses the fragilities and destabilizing feedback mechanisms that are potential features of all major markets-those for goods, labor, and financial assets. We use a Tobin macroeconomic portfolio approach and the interaction of heterogeneous agents on the financial market to characterize the potential for financial market instability. Though the study of the latter has been undertaken in many partial models, we focus here on the interconnectedness of all three markets. Furthermore, we study what potential labor market, fiscal and monetary policies can have in stabilizing unstable macroeconomies. In order to study this problem we introduce, besides money, long term bonds and equity into the asset market. We in particular propose a countercyclical monetary policy that sells assets in the boom and purchases them in recessions. Modern stability analysis is brought to bear to demonstrate the stabilizing effects of the suggested policies. The policies suggested here could help the Fed in its search for an appropriate exit strategy after its massive intervention in the financial market. * The authors acknowledge the comments and suggestions from the audience at the conference in honour of Professor Giancarlo Gandolfo. The usual caveat applies. the financial market), and the period we have just lived through could easily occur 2

Structural financial instability and cyclical fluctuations (original) (raw)

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