Instability in Financial Markets – Sources and Remedies

In the seemingly never-ending aftermath to the economic crisis that began in 2007, there is little disagreement that financial markets are characterized by instability rather than stability. Minsky enjoyed a strong following amongst Post Keynesian economists, but he was almost completely ignored by neoclassical economists before the crisis. Now, after the crisis that his theory anticipated, neoclassical economists are paying some attention to his hypothesis, and there has been at least one attempt to build a New Keynesian model of a key phenomenon in Minsky’s hypothesis. However, to those of us who are not new to Minsky, it is hard to recognise any vestige of the Financial Instability Hypothesis in Krugman’s work. This reaction is based not merely on Minsky’s explicit denial that his hypothesis could be modelled from a neoclassical perspective, but on ways in which it is strictly incompatible with New Keynesian methodology. There are many facets to this, but I will focus on two that are crucial to the link between the FIH and financial market instability: disequilibrium and endogenous money.

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Read also: Instability in Financial Markets – Sources and Remedies – A Minskian View

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About Giorgio Bertini

Director at Learning Change Project - Research on society, culture, art, neuroscience, cognition, critical thinking, intelligence, creativity, autopoiesis, self-organization, rhizomes, complexity, systems, networks, leadership, sustainability, thinkers, futures ++
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