A stochastic extension of the Keen-Minsky model for financial fragility

Friday, May 18, 2012 - 11:00am - 11:45am
Keller 3-180
Matheus Grasselli (McMaster University)
The Keen model consists of a dynamical system describing the interactions between wages, employment rate, and debt in a closed economy. It exhibits one equilibrium where all variables remain finite and another where wages and employment collapse to zero while debt explodes to infinity, both of which are locally stable for typical parameter values. The introduction of a variable representing Ponzi speculation has the effect of destabilizing the first equilibrium, corresponding to a mathematical formulation of Minsky's famous financial instability hypothesis. We propose a stochastic extension of this system by modelling a financial index through a price process with a jump component whose intensity depends on the magnitude of the Ponzi variable. The corresponding compensator that needs to be added to the drift of the index can then be interpreted as an asset price bubble. In addition, we postulate that downward jumps in the index increase the cost of borrowing across the economy, providing a feedback effect in the original system. (This is joint work with Bernardo Costa Lima)
MSC Code: