Modeling Minsky's Financial Instability Hypothesis - A Dynamical Systems Approach

This research project improves the mathematical capabilities of non-Neoclassical economics and uses modern techniques from nonlinear dynamical systems to model the expansion and contraction of credit and its effect on real economic output and asset prices.

Prior to the financial crisis, mathematicians helped develop the Neoclassical paradigm simply because, to them, it was synonymous with economics. Since then, awareness of non-Neoclassical approaches has spread amongst mathematicians. This project attempts to build a more sophisticated analysis starting from the foundations laid by heterodox economists. In this framework, instability and financial crises arise endogenously, rather than through inexplicable external shocks to an inherently stable system. Consequently, the stabilizing effects of policy intervention can also be analyzed in a dynamically consistent setting, instead of being ad hoc measures designed to address isolated phenomena.