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Empirical Analysis of Financial Fragility Hypothesis on the Data of South Korea

Student: Mark Selitskii

Supervisor: Ivan V. Rozmainsky

Faculty: St.Petersburg School of Economics and Management

Educational Programme: Economics (Bachelor)

Year of Graduation: 2020

Global economy crisis in 2008 had spawned debates around reasons of crises on the whole, as well as new theories and hypotheses about nature of economics recessions and crises. One of the most successful and well known hypotheses that goes in contrast with traditional economic thought is financial fragility hypothesis suggested by the post-Keynesian economist Philip Minsky. The main idea of Minsky’s hypothesis is that financial system in capitalistic economy is instable and develops in a cyclic way, going through different stages - from recovery to recession. Minsky had emphasized that each stage of economic cycle is characterized with domination of different financial modes: from significant percent of firms using the most stable hedge mode in the stage of recovery, to prevalence of the most fragile Ponzi-mode in periods of recession. Despite the growth of number of Minsky’s theory supporters, his work is still often criticized by economists. It results in small amount of authors who manage to conduct an empirical analyses with real data, as many publications does not go beyond theoretical rationale of the hypothesis. There exist several empirical studies specialized on countries or regions that badly suffered economic crisis of 2008. In contrast with such studies, this research paper has an aim to provide an empirical analyze of an opposite case - situation of rapid economic growth which took place in economy of South Korea in the 21 century. Accordingly, our research is focused on analyzing Minsky’s theory and on providing an empirical implication of his ideas on data of South Korea before, during and after global crisis, as well as giving a forecast about possible situation in the economy of South Korea in the nearest future. А sample of 102 largest by market capitalization companies from non-financial sector, due to their financial parameters for the period since 2005 to 2019 was divided by types of financing modes suggested by Philip Minsky (hedge, speculative, Ponzi) with the help of five different methodologies created by other researchers of financial fragility hypothesis. After analyzing the dynamic of changes in percentage of hedge, speculative and Ponzi modes among firms in South Korea from year to year and providing a comparison between results, obtained with different methodologies, as well as analyzing financial fragility in the leading industries of country’s economy, we had found a significant decline in percentage of hedge mode firms in the end of observation period. We consider such results agrees upon Minsky’s theory of financial fragility and can be a signal of upcoming recession, which can be more crucial for economy of South Korea than global financial crisis of 2008, especially if regulative actions won’t be taken by the government.

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