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The financial instability hypothesis and the paradox of debt: a microeconometric approach for Latin America

Author

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  • Alejandro González

    (Universidad de Chile, Santiago, Chile)

  • Esteban Pérez-Caldentey

    (Economic Commission for Latin America and the Caribbean–United Nations (ECLAC–UN), Santiago, Chile)

Abstract

Hyman Minsky's financial instability hypothesis (FIH) argues that as part of the normal functioning of capitalist economies robust financial structures tend to evolve into highly leveraged fragile financial structures. The paradox of debt challenges the very foundation of Minsky's FIH as it maintains that the upward and downward phases of business cycles need not be characterized by processes of respective leveraging and deleveraging. Using a panel of firm-level data and seemingly unrelated regressions we analyse the relationship between debt and investment for 12 Latin American countries for the years 2005 (expansion) and 2009 (contraction). We reject the paradox of debt in favor of the FIH, regardless of our model specification or the choice of external financing. The FIH seems to intensify in expansions with respect to recessions, and its intensification during expansions is explained by a larger fraction of firms acquiring debt and new investment projects, rather than from further leveraging for those firms already engaged in fixed investment.

Suggested Citation

  • Alejandro González & Esteban Pérez-Caldentey, 2018. "The financial instability hypothesis and the paradox of debt: a microeconometric approach for Latin America," Review of Keynesian Economics, Edward Elgar Publishing, vol. 6(3), pages 387-410, July.
    • Handle: RePEc:elg:rokejn:v:6:y:2018:i:3:p387-410
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    Keywords

    Minsky; financial instability hypothesis; paradox of debt; Latin America;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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