Modeling in the Macroeconomics of Financial Markets

Abstract

Since the stock price bubble of 1920 and the following 1929–1933 Great Depression, financial crises have become increasingly frequent and globalized. When in the late 2007 the Global Financial Crisis began to show the flawed characteristics of the US capitalist system while spreading throughout all other economies of the world, the ideas of the post-Keynesian School of Economics – a school of economic thought having its origins in The General Theory – and in particular, those of Hyman Minsky, became prominent. Minsky’s conception of “crisis-prone markets” has become fundamental not only to interpret the 2007 credit crunch – as well as a sort of “ignored prediction” – but also to elucidate the features of the post-modern capitalistic system and its evolution. This chapter begins with a review of Minsky’s thought on the inherently unstable nature of capitalism. It then examines Irving Fisher’s debt deflation model and its application to interpret financial crises and recessions. A reflection on the issues of finance-led capitalism in the neo-liberal era completes the first part of the chapter where it is argued that the Minskyian model, if integrated with the social structure of accumulation theory, is very relevant for interpreting the causes and the evolution of the 2007 crisis. The second part of the chapter progresses with the investigation around the constructs of risk and uncertainty, and their modeling in Economics and Business Studies.