Response To The Theory Of The Financial Fragility Hypothesis

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The Financial Fragility Hypothesis (FFH) outlined by Minsky deals with the economies susceptibility to financial crises in relation to overall economic growth and performance (1977a, 1986). There are two main points to Minksy’s hypothesis. The first relates to the capitalistic economy and the financing programs under which it is stable and those programs under which it is unstable. The second point Minsky makes relates to capitalistic expansions, specifically those driven by private spending. These expansions put people and companies at increasingly fragile investment positions. This is further exaggerated by the relaxation of financial restraint and extends the expansion and rising asset prices increase the tolerance of risk among investors (Minsky, 1992). Financial fragility usually refers to a state where an economic unit (household or firm) is vulnerable to financial default and is unable to withstand economic shocks. A fragile system is liable to episodes of financial instability, defined as a sequence of events entailing heightened risk of a financial crisis. A financial cris...

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