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Sunday, September 12, 2010

Modeling Financial Instability...

Most intriguing paper by Steve Keen on Financial and Economic Breakdown: Modeling Minsky's Financial Instability Hypothesis.  Using Goodwin's limit cycle model as his foundation, Keen extends the model to account for the four keys to Minsky's idea:
  1. Tendency of capitalists to incur debt on the basis of euphoric expectations
  2. The importance of long-term debt
  3. The destabilizing impact of income inequality
  4. The stabilizing role of government
Inclusion of Minsky's ideas converts Goodwin's stable but cyclical system into a chaotic one with the possibility of a divergent breakdown (i.e., depression)...

My interest in this paper is that it is the first attempt that I have come across so far that presents a mathematical model of Minsky's Financial Instability Hypothesis.  I would like to try to somehow incorporate these ideas into a network model...here is a link to a paper by Gallegati et al that uses an agent-based approach to model some of these ideas.  

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