New Economic Perspectives

By Felipe Rezende

This part of the series (see Part I and II, here and here) will focus on macroeconomic and microeconomic aspects to financial fragility and provision for liquidity. Minsky’s framework not only sheds light on how to detect unsustainable financial practices, but the position adopted in this paper is that the current Brazilian crisis does fit with Minsky’s instability theory. This is a Minsky’s crisis in which during economic expansions market participants show greater tolerance for risk and forget the lessons of past crises so economic units gradually move from safe financial positions to riskier positions and declining cushions of safety.

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By Felipe Rezende

This series will discuss at length the underlying forces behind Brazil’s current crisis.

Building on Keynes’ investment theory of the cycle, Minsky’s work suggests that the structure the economy becomes more fragile over a period of tranquility and prosperity. That is, endogenous processes breed financial and economic instability. While Minsky adopted Keynes’ “investment theory of the cycle”, he added a financial theory of investment, with a detailed exposition of the theory in his book John Maynard Keynes (1975), which put at the forefront the interrelation between investment decisions and the financial structure designed to allow economic units to take positions in assets by issuing debt. In this regard, debt accumulation is at the core of Minsky’s instability theory. His financial theory of investment incorporated Kalecki’s approach in which aggregate profits are created, mostly, by the autonomous components of demand (Minsky 1986, 1989). One can add to this analysis Godley’s three balances approach, which explores the interlinkages between the government sector, the private sector, and the external sector. This means that a surplus must be matched by an equal deficit and flows accumulate to stocks.

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