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Financial Instability after Minsky:Heterogeneity, Agent Based Models and Credit Networks

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Albeit the majority of the profession either ignores Minskyís Financial Instability Hypothesis (FIH) or considers it plainly wrong, at least since the mid-80’s a few influential economists —who have certainly not embraced any unorthodox
credo —have grown more receptive to this idea and eager to incorporate it in their models, even if diluted and sometimes disguised in order to make it more palatable to the conventional “representative” macroeconomist

Due to the asymmetric information revolution in microeconomics, in fact, and the associated emphasis on capital market imperfections, Minsky’s ideas have got renewed attention and a large macroeconomic literature has developed in which financial factors play a major role: Greenwald and Stiglitz (1993,2003), Bernanke and Gertler (1989, 1990), Kiyotaki and Moore (1997). For the sake of simplicity, we will lump together these models under the general heading of the Financial Accelerator Hypothesis. Bernanke, Gertler and Gilchrist (1999) cast the Financial Accelerator story in a New Keynesian - Dynamic Stochastic General Equilibrium framework. More recently, in the light of the Global Financial Crisis, a variety of “financial frictions” have been incorporated in NK-DSGE models: A non exhaustive list includes Christiano, Motto and Rostagno (2010), Curdia and Woodford (2009), Gertler and Kiyotaki (2011), Gerali et al. (2010), Angeloni and Faia (2009).

Starting from different cultural and methodological premises, this literature yields predictions which are in line with some of the insights one can get from Minsky’s conceptual framework. In other words, the Financial Accelerator and the Financial Instability hypotheses share some features. Should we be satisfied with this? I don’t think so. Minsky’s legacy goes beyond the emphasis on the role of financial factors and provide important directions for future research. In my opinion the role of heterogeneous financial conditions is the specific piece of Minsky’s intellectual heritage that has been so far underresearched and that may be the cornerstone of a new research agenda. Albeit the FIH can be formu- lated without making explicit reference to heterogeneity (section 2), at a deeper level Minsky develops his ideas in an heterogeneous agents’ setting, characterized by hedge, speculative and Ponzi units (section 4). On the other hand, the Financial Accelerator literature is still mainly based on the Representative Agent, heterogeneity been confined to an almost innocuous role (section 3).