The Explanation Of The Financial Crisis And Stochastic Micro-foundation Model Of The Financial Instability Hypothesis

This paper is oriented by the reason why financial crisis is outbreak and on thebasis of Hyman Minsky’s financial instability hypothesis, studying the questionsfollowed:First, the paper summarizes the idea sources and the current development of FIH,and then analyzes the ability and the limits of financial instability hypothesis as anexplanation of the crisis.Secondly, the paper examines the dynamics of financial distress and themechanism of transmission of shocks from the financial sector to the economy. Theanalysis is performs by representing the linkages between microeconomic financialvariable and the aggregate performance of the economy by means of a micro-foundedmodel with firms that have heterogeneous capital structures.The paper classifies the enterprises into hedge, speculative and Ponzi threetypes by Minsky taxonomy, connects the enterprises, investors and the capital markettogether by financing relationship and then analyze the evolution process ofenterprise’s state and capital stochastically by establishing the master equation. Thesemethodologies enable us to provide some effective stabilization policies in afinancially fragile system in order to make the fragile financial system much morestable.The result of the model and the simulation analysis shows that different expectsrates of profit of different investors result in firms switch among three states (hedge,speculative, Ponzi), the proportion of firms in the three clusters decides the financialsystem is stable or not. When the proportion of speculative firms and Ponzi firms ishigher and higher, the financial system will be more and more fragile, and thefinancial crisis will be outbreak when the fragility is too high.