Emergent Macroeconomics: Deriving Minsky’s Financial Instability Hypothesis Directly from Macroeconomic Definitions

Steve Keen

Review of Political Economy, 2020, vol. 32, issue 3, 342-370

Abstract: Though Minsky developed a compelling verbal model of the ‘Financial Instability Hypothesis' (FIH), he abandoned his early attempts to build a mathematical model. I show that the essential characteristics of Minsky's hypothesis are emergent properties of a complex systems macroeconomic model which is derived directly from macroeconomic definitions, augmented by the simplest possible assumptions for relations between system states, and the simplest possible behavioural postulates. I also show that credit is an essential component of aggregate demand and aggregate income, given that bank lending creates money. Minsky's Financial Instability Hypothesis is thus derived from sound macrofoundations. This stylized complex-systems model reproduces both the core predictions of Minsky's verbal hypothesis, and empirical properties of the real world which have defied Neoclassical understanding, which were not predictions of Minsky's verbal model: the occurrence of a ‘Great Moderation' — a period of diminishing cycles in employment, inflation, and economic growth — prior to a ‘Minsky Moment' crisis; and a tendency for inequality to rise over time. The simulations in this paper use the Open Source system dynamics programme Minsky, which was named in Minsky’s honour.

Date: 2020
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DOI: 10.1080/09538259.2020.1810887

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