Minsky Financial Instability, Interscale Feedback, Percolation and Marshall-Walras Disequilibrium

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We study analytically and numerically Minsky instability as a combination of top-down, bottom-up and peer-to-peer positive feedback loops.

The peer-to-peer interactions are represented by the links of a network formed by the connections between fi rms; contagion leading to avalanches and percolation phase transitions propagating across these links. The global parameter in the top-bottom — bottom-up feedback loop is the interest rate. Before the Minsky Moment, in the `Minsky loans accelerator’ stage the relevant “bottom” parameter representing the individual fi rms’ micro-states, is the quantity of loans. After the Minsky Moment, in the `Minsky crisis accelerator’ stage, the relevant `bottom’ parameters are the number of ponzi units / quantity of failures / defaults. We represent the top-bottom, bottom-up interactions on a plot similar to the Marshall-Walras diagram for quantity-price market equilibrium (where the interest rate is the analog of the price). The Minsky instability is then simply emerging as a consequence of the xed point (the intersection of the supply and demand curves) being unstable (repulsive). In the presence of network e ffects, one obtains more than one fi xed point and a few dynamic regimes (phases). We describe them and their implications for understanding, predicting and steering economic instability.