Financial structures and monetary and fiscal policies

Abstract The financial instability hypothesis of the heterodox economist H.P. Minsky came to the fore as a result of the international financial crisis triggered by the sub-prime mortgage crisis in the U.S. Many post-Keynesian economists have developed Minsky’s arguments into mathematical models that depict two types of Minskyian financial structures, which we identify as the lenders’ risk type (LR) and the hedge, speculative, and Ponzi type (HSP). We examine the effects of monetary and fiscal policy in macrodynamic models that consider both the LR and HSP financial structures and demonstrate that the effects depend on the significance of those structures. We emphasize the significance of stable financial structures and the mix of monetary and fiscal policies needed to stabilize the economy. However, we show that the policy mix cannot completely eliminate the fragility of the HSP financial structure. It is crucial to establish institutional frameworks that mitigate the HSP financial structure’s fragility.