System dynamics conceptual model of minsky's financial instability hypothesis

Linh Phan, Mario Beruvides

Research output: Contribution to conferencePaper

Abstract

Following the 2008 financial crisis, a resurgence of many historical financial theories emerged to help explain this economic problem. Among the most insightful was the Financial Instability Hypothesis (FIH) by Hyman Minsky. Minsky theorized that the dominant Keynesian economic model cannot sustain stable prices such that major economic fluctuation is a natural occurrence within the capitalist economy. FIH explains how investment, risk, debt, capital and asset prices, cash flows, interest rate, inflation, fiscal, and monetary policies interact with each other to generate a series of business cycles. Due to the complexity of this theory; thus far, the current literature shows that FIH can only be expressed through lengthy description or partial mathematical models. There is a lack of an effective mean to communicate and represent this theory holistically. This paper introduces a conceptual model that unifies FIH's major components into a system dynamics model expressed as a Causal Loop Diagram (CLD). This CLD is an effective systems analysis tool to illustrate the causal relationships among the components within FIH. This conceptual model consists of three balancing loops and three reinforcing loops that dynamically control the fluctuation of prices, cash flows, debt, and investment.

Original languageEnglish
Pages1967-1972
Number of pages6
StatePublished - 2018
Event2018 Institute of Industrial and Systems Engineers Annual Conference and Expo, IISE 2018 - Orlando, United States
Duration: May 19 2018May 22 2018

Conference

Conference2018 Institute of Industrial and Systems Engineers Annual Conference and Expo, IISE 2018
CountryUnited States
CityOrlando
Period05/19/1805/22/18

Keywords

  • Causal Loop Diagram
  • Financial Instability Hypothesis
  • Hyman Minsky
  • System Dynamics Model
  • Systems Engineering

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    Phan, L., & Beruvides, M. (2018). System dynamics conceptual model of minsky's financial instability hypothesis. 1967-1972. Paper presented at 2018 Institute of Industrial and Systems Engineers Annual Conference and Expo, IISE 2018, Orlando, United States.