There has been much recent interest in the problem of financial instability in the macro economy. Some researchers have looked for cyclical and secular co-movements between debt accumulation, financial crises, and problems in the real economy. Others have tried to rationalise, in formal models, the apparent connections between finance, changes in expectations, and macro instability. Two different points of view are embodied in this work. One, deriving from the work of Minsky, emphasises the importance of ignorance and psychology. Firms are seen as financing accumulation on the basis of unverifiable expectations, accumulating debt burdens in the process. When the debt burdens are large enough, the economy becomes vulnerable to downward revisions of expectations. Such revisions reduce effective demand and stimulate financial crises. A second view emphasises a structural determinant of instability — declining profitability. Problems with profits are viewed as a major cause of debt burdens, and the source of potential financial crisis.
KeywordsInterest Rate Business Cycle Internal Fund Capital Stock Trade Credit
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