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Modeling of Financial Instability Hypothesis for the Contemporary Situation

Student: Ekaterina Zavilovich

Supervisor: Ivan V. Rozmainsky

Faculty: St.Petersburg School of Economics and Management

Educational Programme: Economics (Bachelor)

Year of Graduation: 2018

Ensuring financial stability is an important point of any country's economic policy. The stability of financial indicators contributes to the effective allocation of resources and risks, stimulates economic activity and increases the welfare of the population of the state. However, in recent years it has become absolutely clear that the global financial system is unstable. The purpose of this paper is to develop a formal model that can explain the appearance of financial instability. The theoretical basis of the model is the Hypothesis of financial instability of Hyman Minsky, which describes how the economy endogenously generates a financial structure exposed to economic crises. Also, in order to build an actual model, it is analyzed the existing models, which are of two types: the first type is mainly based on the change in the debt ratio or interest rate, and the second – on the dynamic change in the prices of shares and capital. The result of the research is the SFC (Stock Flow Consistent) model, which includes macroeconomic variables such as GDP, consumption, investment and employment. Moreover, it reflects the behavior of bankers and shows the impact of bankruptcies of firms on the economy. The model illustrates the dynamics of the economic system depending on the type of financing of firms (hedge, speculative and Ponzi). The validity of the results is confirmed by conclusions from Minsky's theory, the dynamics obtained by other researchers and historical examples. The results can be used to predict the behavior of the economy. Furthermore, if the model is expanded by including in it the state and the outside world, it can become a useful tool for government planners, who develop strategies to overcome economic instability and the regression of financial activity in the country.

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