Hyman Minsky

In order to restore the global economy to solid and sustainable growth, capitalism needs to be reformed from an irrational profit-maximising model into a more rational profit-equalising one. In the aggregate the growth rate of gross operating surplus plus gross mixed income must equal that of gross domestic product and not exceed it, thereby ensuring that the compensation of employees increases proportionally as well. This would prevent the deflationary effect of having continually to refinance debt as it increases disproportionally relative to GDP over successive economic cycles, the root cause of which is not treating the compensation of employees as both a cost and an income in the pursuit of maximising profitability. In SNA national income accounting methodology, income derived GDP is equal to gross operating surplus plus gross mixed income plus compensation of employees plus taxes on production and imports less subsidies. Thus, as profit and mixed income increase relative to GDP, employee compensation must necessarily decrease proportionally with allowances for taxes and subsidies. As wages and salaries are both a cost and an income, which is a self-evident truth, if they are suppressed as a cost on the supply side of an economy in order to maximise profit, this reduction affects aggregate demand by a proportional amount on the demand side by weakening the multiplier. This distorts supply and demand, leading to serious economic imbalances over time. Prices or rather their relative components of wages and profit determine the equilibrium of supply and demand in the aggregate rather than the other way around as the fundamental tenet of neo-classical economics proposes.

The equation below provides evidence that the first principle of wages being a cost and an income is key to balancing supply and demand, and income and expenditure over the economic cycle as well as economics becoming a fully-fledged science. Using United States’ national accounts time series data between 1972 and 2007 to empirically demonstrate a causal connection between the real and financial economies, the increasing dysfunction of the business cycle can be explained. Evidence from other national economies is examined as well. Despite wages being both a cost and a source of demand being obvious and fundamental to Keynes’ demand side theory in his General Theory, it has never been properly acknowledged or its effects fully understood. This reluctance to examine profit is an example of the dialectical opposition between convention based on excessive self-interest in the face of a seemingly uncertain and threatening environment and reason based on the underlying scientific laws of nature. Convention is always stronger than reason in the short to medium term and is only forced to become more rational in the longer term once it has finally collapsed under the weight of its contradiction with reality. The convention of profit-maximising capitalism could soon be at this point if the wall of corporate refinancing it faces in the next few years proves to be insurmountable.

The financial instability hypothesis (FIH) was developed by Hyman Minsky in the 80s and early 90s but only gained strong popularity in light of the global financial crisis (GFC) of 2008. The hypothesis is essentially a claim that the financial systems of developed nations are fragile and unstable, where prolonged periods of economic booms will result in a collapse of the financial sector. Among proposals by others, Minsky continuously advocated for policies to deal with these conditions, however, such policies were largely ignored until recently. This essay will analyse and apply the FIH, examine policy recommendations to reduce financial fragility within the financial sector and also outline key shortcomings of Minsky’s hypothesis.

El presente ensayo, busca responder un cuestionamiento fundamental; ¿Son las recomendaciones para reducir la inestabilidad financiera que propone Minsky suficientes para tal objetivo?; para poder dar respuesta a este interrogante, el ensayo, consta de siete apartados, en el primero de ellos, se hará una revisión de los antecedentes de la hipótesis de inestabilidad financiera planteada por Minsky, consecutivamente, el segundo apartado contiene la teoría de la inversión de Minsky, en la tercera parte se analizará la hipótesis de inestabilidad financiera de Minsky, enunciando la clasificación financiera de las empresas, las etapas de la crisis y el efecto de las innovaciones financieras, en el cuarto apartado, se enuncian las recomendaciones de Minsky para controlar las crisis, en la quinta instancia del ensayo, se presentan las críticas a su modelo, en sexto lugar se presentan las conclusiones.

Hyman Minsky’s Financial Instability Hypothesis is used to construct two different indices for financial instability: a long-term index (Long Term Financial Instability) and a short-term index (Short Term Financial Instability). The former focuses on the underlying fragility of financial structures of units in the economy while the latter focuses on more immediate developments and manages to follow turmoil – “a financial crisis” – in the economy. The interplay of the indices with each other, with economic growth and with Foreign Direct Investment, both in general and in the financial industry, is probed.

In short, we find that long term financial stability, i.e. secure financial structures in the economy or a low level of Long Term Financial Instability, is sacrificed for maintaining short term financial stability. However, more Long Term Financial Instability is associated, as Minsky expected, with more fluctuations in Short Term Financial Instability: market turmoil is more common the more fragile underlying financial structures of units in the economy are. This signals that markets are ruled by short-termism. Economic growth is harmed by Short Term Financial Instability but the effects of Long Term Financial Instability are weaker. The common expectation that FDI activities strengthen financial stability is not confirmed. The relationship found hints rather in the opposite direction: FDI activities seem to cause financial instability.

Based on the those investigations and a further empirical work using data from Iceland, Leigh Harkness’s Optimum Exchange Rate System (OERS) is developed further with the intention of solving “The Policy Problem” as described by Minsky. Insights from control theory are used. The OERS, along with public debt management as carried out by Keynes, is argued to have the ability to keep economic activity in the state of a permanent “quasi-boom”. The policy implications are that the OERS should be considered as a monetary policy as it permits a free flow of capital, thereby allowing economies to reap the possible positive benefits of foreign direct investment, while still conserving financial stability.

We hope to model financial fragility and money in a way that captures much of what is crucial in Hyman Minsky’s financial fragility hypothesis. This approach to modeling Minsky may be unique in the formal Minskyan literature. Namely, we adopt a model in which a psychological variable we call financial prudence (P) declines over time following a financial crash, driving a cyclical buildup of leverage in household balance sheets. High leverage or a low safe-asset ratio in turn induces high financial fragility (FF). In turn, the pathways of FF and capacity utilization (u) determine the probabilistic risk of a crash in any time interval. When they occur, these crashes entail discrete downward jumps in stock prices and financial sector assets and liabilities. To the endogenous government liabilities in Hannsgen (2014), we add common stock and bank loans and deposits. In two alternative versions of the wage-price module in the model (wage–Phillips curve and chartalist, respectively), the rate of wage inflation depends on either unemployment or the wage-setting policies of the government sector. At any given time t, goods prices also depend on endogenous markup and labor productivity variables. Goods inflation affects aggregate demand through its impact on the value of assets and debts. Bank rates depend on an endogenous markup of their own. Furthermore, in light of the limited carbon budget of humankind over a 50-year horizon, goods production in this model consumes fossil fuels and generates greenhouse gases. 

The government produces at a rate given by a reaction function that pulls government activity toward levels prescribed by a fiscal policy rule. Subcategories of government spending affect the pace of technical progress and prudence in lending practices. The intended ultimate purpose of the model is to examine the effects of fiscal policy reaction functions, including one with dual unemployment rate and public production targets, testing their effects on numerically computed solution pathways. Analytical results in the penultimate section show that (1) the model has no equilibrium (steady state) for reasons related to Minsky’s argument that modern capitalist economies possess a property that he called “the instability of stability,” and (2) solution pathways exist and are unique, given vectors of initial conditions and parameter values and realizations of the Poisson model of financial crises.

Contrary to conventional wisdom, this paper contends that the excessive development of capital market finance has been one of the catalysts behind the crises and scandals that have unfolded over the past 15 years. In particular, innovative debt transactions have proved instrumental to the creation of excessive levels of risk-taking and leverage, which have had catastrophic consequences, both at the firm and systemic level.

While much regulation has been enacted in response to these crises, the way in which debt transactions in capital markets are designed and entered into remains largely unregulated. Moreover, regulators have so far neglected the role that leverage and debt creation play in the economy and their consequences for the wider social context. Moreover, the recent policy design in the EU is promoting a renewed implementation of an old design, the Capital Markets Union (CMU). This revolves around disintermediated, market-based forms of financing, which should represent an alternative to the traditionally predominant (in Europe) bank-based financing channel. This paper finds that the European policy design fails to appreciate the dangers associated with capital markets finance and its ensuing debt-creating effects. It argues that, despite some regulatory efforts, a suitable architecture for the regulation of disintermediated capital markets is still missing.

Although cultural economy scholarship has highlighted the inherently speculative character of economic action and argued that regulation is often imbricated with (rather than independent from) the speculative logics of economic life, it has stopped short of pursuing the implications for the problematics that have traditionally occupied political economists. To pursue such an analysis, this paper suggests a reframing of the theme of performativity in terms of Luhmann’s understanding of self-reference, arguing that this provides a useful window on the connection between speculation and governance. It then develops these insights by reconsidering Minsky’s work, arguing that in terms of his postfoundationalist sensibilities he may be closer to being a ‘cultural economist’ than a ‘political economist’ and that this deeply shaped his understanding of financial authority and central banking. The paper also argues that, by connecting these insights to Hayek’s critique of rational constructivism, we may get a clearer perspective on the specifically ‘neoliberal’ character of contemporary finance and its governance. In this way, it develops a perspective on political economy questions of public authority and statehood that is informed by the concerns of cultural economy.

I argue the financialisation of the Australian economy has led to a cascading series of vulnerabilities in the Australian financial system. The vulnerabilities begin with the domination of banks in the financial system and the preponderance of the big four banks in the banking system. They are exacerbated by the weight of real estate in the balance sheets of the big four banks. Underpinning the whole edifice is the sharp rise in household debt. Ultimately, the fate of the Australian financial sector – and the fate of the share market and the wider economy – sits precariously on the precipice of over-inflated property markets and debt-ridden households. The debt-house-price-nexus in Australia is like a stretching rubber band. A stretched band can be relaxed gradually or it can be stretched further until, eventually, it breaks. The success of the Australian economy since the recession of the early 1990s, the profitability of the banks and the long-term rise in house prices has inevitability made investors and policy-makers complacent about risks.
Achieving the aim of a balanced financial system requires policy-makers to note the vulnerabilities building up in the Australian financial system and to work to reduce them over time. I argue, however, that financial policy-makers have underestimated the financial vulnerabilities building up in Australia as evidenced by the slow take-up of macroprudential policies and their complacent statements about growing risks. There are three reasons for this sanguine attitude: the policy predilection for idealised economic liberal regulation of the financial sector, Australia's overall growth performance and the profitability of the major Australian banks. Policy-makers appear to believe good fortune will continue indefinitely, but as good investment advisers always note: past performance is no guarantee of future returns. This is especially the case when the good times have gone on so long and "Minskyian” fragilities have built up within the property-finance nexus.

Instability lies at the core of economics. The nature and causes of instability were extensively treated throughout the history of economics. The general aim was to show the presence of the inherent instability in the capitalist organization of the economy. In general, Keynesian-Minskian and Marxian theories of instability are considered to be the most influential.
This paper is about theories of instability with a critical discussion of the ideas that are set forth. Core of this work focuses on Financial Instability Hypothesis of Hyman Minsky, and assesses its strengths as well as its weaknesses. In doing that, this paper also compares and contrasts the ideas that are set forth by Keynesian-Misnkian and Marxian traditions, with a special emphasis on the treatment of the role of money, credit, and financial intermediation in Marx. Finally, the possible insights from the Schumpeterian analysis are investigated.
Section one provides a brief introduction, followed by the presentation of the assumptions and the workings of Keynesian instability as it provides the basis for Minskian analysis. Section two gives an account of Financial Instability Hypothesis by focusing on the strengths and the weaknesses of the theory, and also emphasizes some of the neglected macro dynamics in Minsky. Section three focuses on the role of money, credit, and financial intermediation in Marxian setting, and the differences between the Keynes-Minsky and Marxian approaches to instability. Section five investigates the possible contribution of the Schumpeterian analysis to the instability theories. Section six briefly restates all of the above discussions and provides a conclusion.

David Harvey argued there to be an animating tension at the heart of the geographical dynamics of capital: a simultaneous need for both spatial fixity and perpetual motion. I adapt this frame for an era of financial globalization, arguing that fixity has been overcome through a 'quaternary circuit' of credit-mediated capital switching which undermines the distinct roles of the three circuits Harvey identified. However, rather than resolving the fixity/motion contradiction this has instead given it intensified form as capital liquidity versus spatial fixity. I explore this through the Port of Liverpool's innovative 'Whole Business Securitization', tracing out the logic of leverage underpinning financial capital switching and how such practices transform the spatio-temporality of circulation while fostering the conditions for greater crises. By theorizing financial globalization from a capital switching perspective, this article combines Minskian and relational approaches to understanding investment chains in a way that reprises geographical political economy's critique of the territoriality of capitalist crisis.

This paper shows credit money to expand beyond base money to fund debt. Two financial innovations (securitisation and derivatives) were used to expand the money supply to dangerous levels. The optimism of economic actors fails to support the hypothesis with subdued levels of confidence seen over the period. Looking at three sectors of the economy (firms, households and banks), greater indebtedness is seen to differing degrees. Monetary financial institutions saw the greatest rise in debt but along with firms, escaped the financial crisis in a fair condition (mainly due to government bailouts). Households, although not as indebted as banks, bore most of the fallout. Household debt -to-income did increase heavily over the period sustained and directed towards residential property. A tipping point was reached whereby households defaulted on payment commitments resulting in a debt-deflation spiral. Finally, this paper shows that the profit and investment of private sector firms to drive the economy.

The 2007/2008 crisis revealed the inefficiency of markets’ self-adjustment mechanisms and the inability of related regulatory policies to keep markets on a consistent path. Something went wrong with the free market myth. From this perspective, the paper brings to the fore the regulatory roots of the crisis and highlights the importance of the cognitive bias as well as the incompatibility between micro-rationality and macro-stability in the occurrence of crises. It then analyzes the endogenous instability of finance-led capitalism in a Minskyian vein to point out the crucial role of regulatory structures for macro-stability. The paper then argues that financial stability calls for fundamental modifications of the institutional structure of markets and for new policy principles. Macro-prudential regulation must replace market-oriented supervisory approaches to prevent shortsighted speculative activities and to direct financial markets toward funding productive activities in ways other than though neoclassical market based incentives.

This paper evaluates the Minsky hypothesis. I discuss the Austrian theory of the business cycle against his theory, from the perspective of the theory and with reference to the current crisis. Minsky offers some of the theoretical details of speculation during the boom phase, which is a positive feature of his hypothesis and allows us to see more clearly how the recent financial crisis played itself out, but in the end his cycle theory remains incomplete. The Minsky moment—a feature of the recent housing bubble—is something that the Austrian theory of the cycle is already fit to explain.

Review of Austrian Economics, 23 (September) 2010:  199-221

Market capitalism typically goes through cycles of expansion and contraction. Every now and then, these common economic cycles go off the hinges. They become unstable and can lead to recessions, crises and depressions-phenomena that economists typically explain by looking to exogenous forces. Alternative explanations-mostly Marxian and Keynesian-for the instabil-ities have been sought within the structure of the economic system itself. One such explanation is provided by Steve Keen in his Goodwin-Minsky model. The model effectively mimics the dynamics of key indicators prior to, during and after the 2007/08 crisis. However, the model is also over-specified, highly sensitive to initial conditions and therefore more difficult to convey. In line with George Box's plea for parsimony, this paper presents a more straightforward version of Keen's model that remains consistent with its fundamental behaviour. The model also illustrates the potential for further dialogue between Marxian economics and system dynamics.

Many papers discuss causes of Iceland’s financial crisis, but none has examined what the Icelandic crisis revealed about international financial markets prior to 2008. Global financial markets’ failure to recognize the familiar signs of an oncoming crisis reflects either an ignorance of developing economies’ antecedents to Iceland’s financial liberalization and crisis, or an overriding belief that Iceland was somehow different. They also illustrate Keynesian and Minskyian theories about the instability of finance and its tendency toward crisis. This paper briefly reviews theories of the linkage between financial liberalization and crisis, empirical evidence of that connection, and analyses of Iceland’s financial crisis. It contributes a comprehensive depiction of Iceland’s macroeconomic fundamentals leading into 2008, as well as an explanation of how positive reports like Frederic Mishkin’s and Richard Portes’s as well as credit rating activity by Moody’s bolstered positive views of Iceland’s financial and economic stability. It culminates with an explanation of why Iceland’s crisis was a surprise in global financial markets, despite ample empirical evidence and reports by academics, policy makers, and private credit rating agencies that Iceland was destined for a collapse.

Approaches that support the process of financial liberalization usually assume that free markets can ensure systemic adjustment in case of disequilibria without structural public interventions, and self-regulation mechanisms are more efficient than any collective regulatory mechanism. This article seeks to assess the irrelevance of these critical assumptions with regard to systemic viability in capitalist economies. These assumptions and related (de)regulatory (de)structural reforms implemented in the last decades reveal to be inconsistent with the characteristics of capitalist economies in light of the 2007-08 crisis. In the footsteps of Hyman Minsky, it maintains that financial instability and crises are endogenous phenomena in a capitalist economy and imply tight state intervention. It then argues that financial stability is a public matter and in order to reach societal efficiency and systemic viability, it is necessary to carry out a public organization of markets according to ...

Las crisis recurrentes de las economías de mercado ha dado origen a un debate que, desde sus inicios, se planteaba irresoluble. De un lado, están aquellos que observan en las crisis el signo fatal y orgánico del capitalismo. De otro, los teóricos liberales que en el intervencionismo y en la planificación central encuentran la razón última de los ciclos económicos. ¿Tiene mérito la pretensión de elaborar una teoría general de la crisis?, ¿son los ciclos económicos resultado de la dinámica capitalista o son la consecuencia de políticas que impiden el desenvolvimiento espontáneo de las fuerzas del mercado? ¿Puede hablarse de un consenso liberal?, ¿en qué se diferencian el enfoque de la escuela austriaca y el de Milton Friedman?, ¿qué relación hay entre Hayek, von Mises y el poskeynesiano Hyman Minsky?

El presente ensayo estudia, desde una perspectiva crítica, el enfoque de la escuela austriaca y lo contrasta con distintas teorías del ciclo económico endógeno.

The Great Financial Crisis and subsequent Great Recession have opened many eyes to the deficiencies of mainstream economics, what is often known as neoclassical economics. Important strands of hitherto overlooked heterodox economics have gained a new prominence. The question this workshop raises concerns the consequences for political theory if neoclassical economics is rejected and alternative schools of economics are taken up. To address this question one could imagine at least two main strands of research. One would be retrospective. It is arguably the case that many of the most prominent works of contemporary political theory do incorporate neoclassical models of the economy. In important passages, for example, of John Rawls's A Theory of Justice the economy that is present is very similar to neoclassical economics. The questions that might be addressed then are whether it is the case that the economy in works like this is in fact neoclassical? If so is this fact significant? Does the political theory depend logically on the presence of a neoclassical economy? Finally, the question could be considered whether it would make a difference to the theory if the economy in the theory were of a different school. A second strand of research might turn on the challenges posed to political theory by heterodox economics with respect to its description of how the economy works and to policy proposals. For example, the school of economics known as Post-Keynesianism argues that the return to labour, that is wages and salaries, is not a function of the marginal product of labour but a result of the contest of power between labour and capital. If the latter is in fact the reality of the modern economy, how might political theory incorporate such insights into its idea of the fair or just economy? Post-Keynesians do not assume endogenous tendencies toward equilibrium or market optimality and see the chief policy problem as one of deficient effective demand. An important remedy to this problem for Post-Keynesians is the Job Guarantee. The state should always stand ready to finance the employment of those wishing to work who are unable to find work in the private sector. (See Hyman Minsky, L. Randall Wray and Pavlina Tcherneva.) By contrast the Varieties of Capitalism literature addresses the lack of real

Until recently, the deepening of financial markets in developing countries has been almost unequivocally seen as growth-enhancing.  A well-developed capital market – so the argument – could provide a source of finance for productive investment, fostering growth. South Africa possesses one of the oldest stock exchanges among emerging economies, the Johannesburg Stock Exchange (JSE). Hence, it provides a good case study to scrutinise this growth-enhancing effect.
The South African equity market is a source of substantial funds for mining companies, however, the employment impact of their activity is limited.  This paper will show evidence that listed mining companies use the JSE to finance their speculation in assets instead of productive and job-creating investment. Detrimental effects on monetary policy and domestic credit growth can be expected since external finance is not flowing towards productive investment but ends up as cash holdings on corporate balance sheets. This trend in turn encourages rapid credit expansion, which recently favoured unsustainable consumption-driven growth in South Africa,  leaving the country with heavy job losses and high household debt in the aftermath of the global financial crisis.   
The article is organised as follows: part II shows that precaution is a valid motivation to hold cash, but mining firms also need liquid assets due to the speculative nature of their investment. These South African findings will be contrasted with international empirical evidence as well as theoretical explanations offered by economic theory in part III. Finally, in part IV the socio-economic consequences of these cash holdings will be outlined in brief and from a macroeconomic perspective, before part V concludes.

The paper aims to show that Schumpeter’s unsystematic, and unexplored, reflections on “state action” constitute a hidden and unexploited gem in his work. Their reconstruction points toward an institution that, through history, exercised the functions of market maker, macro-strategist, venture capitalist in chief (forging and funding industries, and crafting innovation and technology policies) and creative destruction manager (stimulating the creative part of the process in order to speed productivity enhancement and innovation diffusion and acting as a buffer to its destructive dimension). The main claim then, is that these traces constitute the building blocks of a proper economic theory of the State as an “entrepreneur”, and they are all in Schumpeter. Additionally, the paper submits that their contemporary relevance shows up in many developmental trajectories, but especially in China today. It closes with the proposition that bringing the State into Schumpeter’s creative destruction paradigm doesn’t harm or violate it. It’s a needed improvement.

This article suggests an institutionalist analysis of monetary capitalism and points to the inconsistency of liberal regulation mechanisms. It leans on the characteristics of money in a capitalist economy, often ignored by the consensual wisdom but explicitly studied by institutionalist approaches as major concerns in economic evolution. The article then shows, in a Minskyian vein, the weaknesses and irrelevance of liberal financial structures with regard to the prerequisites of sustainable macroeconomic stability. The main implication is that macro-prudential regulatory reforms must be designed and implemented to tame speculative finance. Therefore, market-based self-regulation mechanisms must be replaced by public regulation processes that could be framed on two rules: preventive-constrained finance and preventive-binding funding.

This article argues that the financial liberalization of the last decades that resulted in a worldwide crisis relied on an institutional change which ill-shaped actors’ behavior so as to let them enter into unsustainable speculative activities at the expense of macro stability. To support such an assertion the article draws upon a specific Veblen-Minsky approach to a credit-money economy and its endogenous fragilities. It maintains that when financial markets are liberalized and private-interests-related self-regulation replaces public macro-prudential supervision, the financial system undergoes institutional deadlock and the ensuing confusion is transformed into a market gridlock. Markets then become unable to recover without public rescue operations of banks. The subsequent negative economic and social consequences are beyond the limits of any acceptable liberal ideology and scientific understanding. Therefore systemic stability calls for a tighter macro-regulatory framework to remove the domination of speculative finance over economic decisions and activities.
Keywords: Cognitive dissonance, financial crisis, financial liberalization, institutional change, institutional deadlock, regulation

JEL Classification Codes: B52-G01-P11

El propósito de este trabajo es indagar la lógica que subyace de la independencia del Banco Central Europeo (BCE) a la luz de las teorías del excedente, la producción y el dinero de la economía política. A partir de este enfoque, la hipótesis de investigación que se contrasta es la siguiente: los costos laborales unitarios reales (CLUR) y la tasa general de ganancia han sido los instrumentos fundamentales del BCE que coadyuvaron a alcanzar el crecimiento junto a la estabilidad de precios en la eurozona en el periodo 1999-2018. Se aplicó un modelo ARDL en panel de datos y la prueba causalidad de Granger, cuyos resultados sugieren el cumplimiento de la hipótesis antedicha.

I suggest that market concentration at aggregate level has a significant structural impact on the wage differential between white-collar and blue-collar workers. Both phenomena are increasing as larger firms are more inclined to employ and pay more white-collar workers, in order to increase and/or maintain their market share by way of innovative tasks carried out by white-collars such as R&D, design and product differentiation, financial/capital market operations, market research, advertising and sales operations, etc. The causality from market concentration to wage differential runs through an effective demand channel and one based on the diffusion of innovations. The innovative contribution of the paper is to reveal this relationship of structural causality, and to provide a new measurement of aggregate market concentration which is calculated as the reverse of the break-even point. The argument is tested for the case of the USA between 1964 and 2007 using Vector Error Correction Model. The findings confirm the existence of a long-run positive relationship from market concentration in the nonfinancial corporate sector to the wage differential.

In his book 'The Specter of Capital', Joseph Vogl weaves the story of neo and new classical economics into Marx’s vision of the capitalist machine. His core argument is that modern financial theory has transformed Adam Smith’s account of the market into a distributed form of numerical machinery.

Purpose-The purpose of this study is to investigate why "financial fragility" carries different definitions in the economic literature. This is a useful task as the detection of "financial fragility" depends, in part, upon how one defines it. According to Post Keynesian economists, financial fragility is a process that can culminate in financial instability (an event). For mainstream or New Keynesian economists, financial fragility has been traditionally defined as a state in which a shock can trigger instability. More recently, however, mainstream economists have recast their definition as a particular form of financial instability-an event. Each definition of financial fragility is intimately linked to the theoretical foundation upon which it rests. This carries important implications for the ability of policymakers to assess and manage the health of an economy. Design/methodology/approach-The different approaches to the definition and detection of financial fragility are compared using corresponding sets of indicators. Indicators for the Post Keynesian approach are derived from a simple cash-flow accounting framework, in the spirit of Hyman Minsky. The economy selected for study is New Zealand. Findings-According to the Post Keynesian approach, New Zealand has been in a financially fragile state for over three years, a period during which policymakers could have been creating ways to make New Zealand more resilient to the onset of instability. According to the New Keynesian approach, New Zealand may just now be experiencing fragility, giving policymakers much less time to react. Originality/value-This study traces the definitions of financial fragility to their underlying theoretical frameworks and draws the implications for the methods of detecting financial fragility.

Following the financial fragility approach of H. Minsky and its later extension by J. Kregel, the paper addresses some basic aspects of the dynamics and management of foreign debt in the perspective of the emerging countries. Minsky's definitions of hedge, speculative and Ponzi positions are restated in order to define a country's external fragility. How international asymmetries in the external financial fragility may influence global fragility is then discussed, leading to analyse the limits of financial openness. Finally, the distinction between domestic and external financial fragility permits to look at how the dynamic interplay among the economic units, including the government and its policies, may influence both the distribution and the level of the two types of fragilities.

Many papers discuss causes of Iceland’s financial crisis, but none has examined what the Icelandic crisis revealed about international financial markets prior to 2008. Global financial markets’ failure to recognize the familiar signs of an oncoming crisis reflects either an ignorance of developing economies’ antecedents to Iceland’s financial liberalization and crisis, or an overriding belief that Iceland was somehow different. They also illustrate Keynesian and Minskyian theories about the instability of finance and its tendency toward crisis. This paper briefly reviews theories of the linkage between financial liberalization and crisis, empirical evidence of that connection, and analyses of Iceland’s financial crisis. It contributes a comprehensive depiction of Iceland’s macroeconomic fundamentals leading into 2008, as well as an explanation of how positive reports like Frederic Mishkin’s and Richard Portes’s as well as credit rating activity by Moody’s bolstered positive views of Iceland’s financial and economic stability. It culminates with an explanation of why Iceland’s crisis was a surprise in global financial markets, despite ample empirical evidence and reports by academics, policy makers, and private credit rating agencies that Iceland was destined for a collapse.