Models of Financial System Fragility

by Iancu, Aurel
Published in Romanian Journal of Economic Forecasting
, 2011, volume 14 issue 1, 230-256

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This survey analyses two types of models: 1. Models based on assumptions of monetary and financial market equilibrium disturbance, in line with mainstream thinking according to which if there is a self-regulating market the units would have rational expectations, and the crisis would be a temporary phenomenon caused by exogenous shocks. Here are the main objectives and features characteristic of three generations of models; 2. Models based on financial instability hypothesis, taking into account the dynamics of financial market, as well as the role of uncertainty, interdependency and dynamic complexity. We present here Minsky’s concept of financial instability and then analyse the content of some simplified models.

Keywords: instability, model generations, balance sheet, hedge units, speculative units, Ponzi units, cyclical fluctuations, complexity
JEL Classification:
C61; C62; C83; D84; E12; E13; E32; F44