A simple model of Minsky’s Financial Instability Hypothesis

Armando Álvarez ()
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Armando Álvarez: Department of Economics, Trinity College, USA

No 2611, Working Papers from New School for Social Research, Department of Economics

Abstract: This paper develops a simple and teachable shifting equilibrium model of Minsky's Financial Instability Hypothesis by integrating a benchmark post-Keynesian model of endogenous money with Minsky's own ideas of the introduction of money through credit, the profit-seeking behavior of the banking sector, and his classification of financial postures. The paper highlights how financial crises are intrinsically connected to economic decisions made under fundamental uncertainty that Minsky, following Keynes, considered inherent in capitalism. The model focuses on credit-financed investment decisions by non-financial firms and the corresponding lending by profit-seeking banks. The paper introduces a ratio of Ponzi-speculative to hedge units, which connects the macroeconomic outcome with the micro classification of individual firms according to Minsky's financial postures.

Keywords: Endogenous money; financial instability; financial postures (search for similar items in EconPapers)
JEL-codes: E12 E44 G01 G21 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2026-10
New Economics Papers: this item is included in nep-fdg, nep-his, nep-hme, nep-hpe and nep-pke
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Persistent link: https://EconPapers.repec.org/RePEc:new:wpaper:2611

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