The Self-Defeating Pursuit of Stability

Matthew Greenwood-Nimmo

EKONOMIAZ. Revista vasca de Economía, 2009, vol. 72, issue 03, 224-243

Abstract: Minsky’s contention that stability is destabilising has profound implications for the conduct of stabilisation policy. The pursuit of price stability by central banks rests on the assumption that (price-level) stability begets financial stability. However, that hypothesis has been violated in recent years by the increasing incidence and severity of financial bubbles during the most remarkable period of prolonged economic stability in recent memory. Using an uncontroversial two-step estimation procedure, this paper demonstrates that periods of stability variously defined have led to increased corporate leveraging in the US since the 1970s. If one accepts that a firm’s ability to service its debts decreases as the ratio of debts to income increases, ceteris paribus, the results provide strong support for the Minskyan view.

Keywords: Financial Instability Hypothesis; condicional volatility; stabilitation policy. (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 (search for similar items in EconPapers)
Date: 2009
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