On Minsky's Financial Instability Hypothesis

The explanation of the causes of the crisis is a difficult problem in economics.In the exploration of the causes of the crisis in the 1980 s,New Keynesian economists believed that the inherent market friction hindered the return of the economy to equilibrium,so they supported Keynesianism and government intervention.New classical economists firmly believed in the power of the market itself,advocated free economy and market economy,and supported government intervention is not only useless or even harmful.In view of the above two views,Minsky opposes the complete free market.He believes that the market mechanism contains unstable factors and needs to intervene to avoid the unseen hand moving towards disorderly adjustment.Minsky also opposed the New Keynesian policy of fine-tuning aggregate demand.Minsky argues that fine-tuning,while temporarily dampening instability,saves energy for later,more serious crises.Therefore,Minsky's theory of "Financial Instability Hypothesis" based on Keynes' s "investment-centered explanation of economic cycle" gives the causes of financial crisis from the perspective of financial instability.In Minsky's view,during the period of economic expansion,the motivation of entrepreneurs and bankers to pursue profits leads to the increase of investment,the relaxation of financial control and the emergence of financial innovations cause the increase of the proportion of speculative financing and Ponzi financing with higher risks.At the same time,the financial system becomes more fragile and the finance becomes more unstable.Minsky points out that financial instability is the main cause of the financial crisis,but improper use of financial supervision methods and government intervention policies would also increase instability.The "Financial Instability Hypothesis" provides a new perspective for the economic circles to study the crisis,but it also has some problems,such as lack of theoretical models and empirical tests,inadequate explanations of why financial structure and financial relations develop towards such a fragile structure over time,and lack of systematic explanations of factors restricting the financial transition to instability.In this paper,literature analysis is used to study the theory of "Financial Instability Hypothesis".This paper focuses on the path of financial instability and the factors restricting the financial turn to instability.It also summarizes the controversy and development of the "Financial Instability Hypothesis" theory and focuses on the development of theoretical models.The financial crisis in 2008 made people review the shortcomings of the financialsystem and modern economic and financial theory.Many scholars re-studied Minsky's "financial instability hypothesis" and called the 2008 financial crisis as "Minsky moment".At the opening day meeting of the delegation of the 19 th National Congress of the Central Financial System on October 19,2017,Zhou Xiaochuan,former governor of the Central Bank,also mentioned: "If there are too many pro-cyclical factors in the economy,this cyclical fluctuation will be greatly magnified,and if the period of prosperity is too optimistic,contradictions will accumulate.At a certain time,there will be the so-called Minsky moment." Therefore,studying the theory of "financial instability hypothesis" is not only conducive to understanding the causes of financial crisis,but also conducive to better prevent financial crisis and make China's economy run more smoothly.