The financial instability hypothesis almost 50 years later
Ivan V. Rozmainsky
National Research University Higher School of Economics in Saint Petersburg, Russia This email address is being protected from spambots. You need JavaScript enabled to view it.
National Research University Higher School of Economics in Saint Petersburg, Russia This email address is being protected from spambots. You need JavaScript enabled to view it.
TERRA ECONOMICUS, Vol. 23, No 1, 2025/03/26
Citation: Rozmainsky I.V. (2025). The financial instability hypothesis almost 50 years later. Terra Economicus 23(1), 21–36 (in Russian). DOI: 10.18522/2073-6606-2025-23-1-21-36
The article provides an overview of the theoretical content and empirical applications of the financial instability hypothesis formulated by Hyman Minsky and also known as the financial fragility hypothesis. It is shown that this theory is a development of John Maynard Keynes’ ideas about the internal instability of the capitalist system. According to this hypothesis, as economic recovery progresses, firms move to more “fragile” financing regimes, in which their cash flows begin to be insufficient to meet debt obligations. The longer prosperity lasts, the greater the proportion of firms characterized by “fragile” financing regimes. According to this hypothesis, the proportion of “fragile” firms should reach a maximum before and at the height of the recession. Thus, “stability is destabilizing”. The experience of the Great Recession of 2008–2009 increased interest in the financial instability hypothesis, leading to a large number of empirical studies over the past fifteen years, based on data from countries such as the United States, Western Europe, Latin America, Asia, Russia, etc. The article attempts to comprehend and summarize these studies. Most of these studies conclude that private firms accumulated financial fragility before the Great Recession and the Recession related to the COVID-19 pandemic, as well as, in some European countries, before the European Debt crisis. The cases of applying the financial instability hypothesis to non–trivial cases are also considered, from the consequences of company diversification to the consequences of institutional reforms. The issues of analyzing the financial fragility of the public sector and the household sector are also discussed.
Keywords: financial instability hypothesis; financial fragility; Minsky; Ponzi firms; Great Recession; Post Keynesian economics
JEL codes: B59, E12, E32, E44, E52
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Publisher: Southern Federal University
ISSN: 2073-6606
ISSN: 2073-6606