The role of central banks in the Financial Instability Hypothesis

Barkin Cihanli

Chapter 7 in Central Banking, Monetary Policy and Financial In/Stability, 2025, pp 119-138 from Edward Elgar Publishing

Abstract: The framework of the Financial Instability Hypothesis consists of a holistic approach to the changes within the capitalist economy of the United States and the evolution of the financial structure of the economy. Hyman Minsky always emphasized the importance of finance in the capitalist system and described finance as a constantly evolving mechanism that creates inherent stability for the economy. Minsky also proposed policy solutions to mitigate the instability caused by financial innovation and evolution. He considered the institutions, specifically central banks, within the capitalist system as the most fundamental elements in regards to providing stability to the innately unstable system. However, what is the source of the inherent instability in the capitalist market economy? What are the roles and responsibilities of the institutions, specifically central banks, in a market economy? What is the relationship between the evolutionary process of the finance and the evolutionary process of the central banks in a market economy? This chapter will attempt to address these research questions by analyzing and evaluating the Financial Instability Hypothesis in regards to financial instability and the institutions. This chapter will also address the policy solutions proposed by Minsky in regards to the restructuring and the reform of the public and private institutions within the system. In light of Minsky's proposals, the goal of this chapter is to argue that the Financial Instability Hypothesis is a holistic approach, because it emphasizes the dynamic role of and changes in the institutions of the system together with the theory of investment, finance and unemployment along with the analysis of the capitalist economy of the United States. The reformation and the restructuring of the institutions must take into account the role of and modifications in institutions and the theory of investment, finance and unemployment for the purpose of the attainment and maintenance of full employment so as to mitigate the instability of the system, because Minsky's proposals of mitigating the innate instability of the capitalist system rest on the idea of reforming the public and private financial institutions and sector and fighting poverty and unemployment.

Keywords: Financial instability; Financial reform; Central banks (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035302147
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