Minsky’s financial instability hypothesis in a New Zealand context

Abstract

This thesis examines Minsky's Financial Instability Hypothesis. Minsky believes that economic activity must be examined from a financial perspective, in the light of imperfect expectations and uncertainty. Minsky suggests that dynamic responses to favourable experience will lead to increased leveraging and the greater articulation of receipts and disbursements. These dynamics increase the susceptibility of agents to unforeseen events and Minsky focuses on endogenous financial events, in particular financial linkages and interest rate increases, that lead to such falsifications. Minsky suggests that when expectations are falsified, agents will be forced to liquidate assets in an attempt to meet cash flow obligations, but their ability to realise cash from such asset sales is circumscribed in a macroeconomic crisis because many firms find themselves in a similar situation. This leads asset values to decline dramatically. This thesis takes an historical-institutional approach and examines Minsky's Hypothesis in the context of the 1987 New Zealand Sharemarket Crash. The thesis focuses on public companies and the events of the late 1980s. It is found that elements of Minsky's theory are consistent with the economic events of the late 1980s, particularly the rise and fall of the New Zealand property market.