Financial fragility in developing economies

Abstract

The paper develops a mathematical representation of Hyman Minsky’s (1975, 1982) regimes of hedge, speculative, and Ponzi finance. The Minskian model of Lance Taylor and Stephen O’Connell (1985), which analyzes the dynamics of a closed Kaleckian economy where growth has a positive feedback on investment through a rise in exuberance and monetary policy is directed at stabilizing the growth rate, is modified to allow for finance of investment through capital inflows, which allows the economy to reach the speculative regime. When interest rate policy stabilizes the growth rate a positive growth rate shock can set off a dynamical path that brings the economy into the Ponzi regime of financial fragility.

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