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Learning, Expectations, and the Financial Instability Hypothesis

Author

Listed:
  • Martin Guzman

    (Columbia University)

  • Peter Howitt

    (Brown University)

Abstract

This paper analyzes what assumptions on formation of expectations are consistent with Minsky’s Financial Instability Hypothesis (FIH) and its corollaries. The FIH establishes that financial relations evolve over time turning a stable system into an unstable one. Financial crises would be more likely to occur, and more severe if they occur, the longer the previous crisis recedes into the past. We show that the hypothesis is consistent with assumptions on formation of expectations that imply learning from realization of states and inconsistent with the assumption of full information rational expectations.

Suggested Citation

  • Martin Guzman & Peter Howitt, 2015. "Learning, Expectations, and the Financial Instability Hypothesis," Working Papers Series 33, Institute for New Economic Thinking.
    • Handle: RePEc:thk:wpaper:33
    DOI: 10.2139/ssrn.2718730
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    References listed on IDEAS

    as
    1. Anton Korinek, 2011. "The New Economics of Prudential Capital Controls: A Research Agenda," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(3), pages 523-561, August.
    2. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115(1), pages 69-102.
    3. John Geanakoplos & Robert Axtell & J. Doyne Farmer & Peter Howitt & Benjamin Conlee & Jonathan Goldstein & Matthew Hendrey & Nathan M. Palmer & Chun-Yi Yang, 2012. "Getting at Systemic Risk via an Agent-Based Model of the Housing Market," American Economic Review, American Economic Association, vol. 102(3), pages 53-58, May.
    4. Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Russo, Alberto & Stiglitz, Joseph E., 2010. "The financial accelerator in an evolving credit network," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1627-1650, September.
    5. Patrick Pintus & Yi Wen, 2013. "Leveraged Borrowing and Boom-Bust Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(4), pages 617-633, October.
    6. Emine Boz & Christian Daude & Bora Durdu, 2008. "Emerging market business cycles revisited: learning about the trend," International Finance Discussion Papers 927, Board of Governors of the Federal Reserve System (U.S.).
    7. Gai, Prasanna & Haldane, Andrew & Kapadia, Sujit, 2011. "Complexity, concentration and contagion," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 453-470.
    8. Milani, Fabio, 2007. "Expectations, learning and macroeconomic persistence," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2065-2082, October.
    9. Boz, Emine & Daude, Christian & Bora Durdu, C., 2011. "Emerging market business cycles: Learning about the trend," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 616-631.
    10. repec:bla:scandj:v:80:y:1978:i:3:p:265-82 is not listed on IDEAS
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    Cited by:

    1. Guzman, Martin & Ocampo, Jose Antonio & Stiglitz, Joseph E., 2018. "Real exchange rate policies for economic development," World Development, Elsevier, vol. 110(C), pages 51-62.
    2. Martin Guzman & Joseph E Stiglitz, 2021. "Pseudo-wealth and Consumption Fluctuations [Emerging market business cycles: the cycle is the trend]," The Economic Journal, Royal Economic Society, vol. 131(633), pages 372-391.
    3. Martin Guzman & Joseph E Stiglitz, 2020. "Towards a dynamic disequilibrium theory with randomness," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 36(3), pages 621-674.

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    More about this item

    Keywords

    Wealth distribution; income distribution; Cambridge theory.;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G01 - Financial Economics - - General - - - Financial Crises

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