FINANCIAL INSTABILITY HYPOTHESIS

Hyman Minsky Financial Instability Hypothesis

Hyman Minsky Financial Instability Hypothesis

Financial Instability Hypothesis - the theory

Hyman Minsky's financial instability hypothesis has taken into account both the practical and theoretical aspects of instabilities that can be exhibited by the economies. The practical aspect of the theory suggests that capitalist economies time to time show signs of inflation and deflation, which in some cases may go completely out of control. The theoretical aspect of the hypothesis suggests that the economy is capitalist with expensive capital assets and a complicated system. It also identifies the economic problem as capitalist development, whereas it should have been distributing resources among different employments (Minsk, 1992).

The capital development of money is associated with present and future money. Present money is referred to the investments made today, whereas the future money will be the profits that the capitalist firms will reap in the future (Minsk, 1992).

Hyman Minsky's work got acknowledged when the world witnessed a terrible fiscal crisis. The subprime credit crisis which hit United States and its related economies in the late 2000s made people give importance to Minsky's work and it got revived again (Tropeano, 2010).

Business cycle

The basic Minsky cycle given in financial instability hypothesis presents a theory related to the business cycle. When businesses are in the Growth phase, they become more optimistic about the subsequent outcomes. This optimism reflected in the increasing values of assets and related revenues. This optimism creates a readiness to take more risk in faith that the good times will exist forever; this is the time where businesses are in the Peak phase. In this phase, businesses tend to take all kinds of risks and invest as much as they can. All of the firm faith creates a bubble which keeps getting bigger with more optimism. Since, there is a certain ...