Author(s)

Terence Tai-Leung Chong^1,2, Richard J. Cebula³, Fangping Peng⁴, Maggie Foley³

¹Department of Economics, The Chinese University of Hong Kong, Hong Kong.
²Department of International Economics and Trade, Nanjing University, Nanjing, China.
³Davis College of Business, Jacksonville University, Jacksonville, Florida, USA.
⁴Business School, Sun Yat-sen University, Guangzhou, China.

This study reveals endogenous instability in the financial market based on the dynamic interaction between endogenous investment behavior and debt in a nonlinear framework, by using a nonlinear model predictive control (NMPC) approach. It is found that when the debt ratio is below a critical threshold, increased debt has a positive effect on investment. On the other hand, when the debt ratio is above that threshold, growing financial stress and greater debt become a drag on investment, leading to an economic downturn and an outbreak of financial crisis. The paper provides theoretical support for Minsky’s financial instability hypothesis.

Minsky Cycles, Financial Instability Hypothesis, Investment

Chong, T. , Cebula, R. , Peng, F. and Foley, M. (2015) Explaining the Financial Instability Hypothesis with Endogenous Investment: A Nonlinear Model Predictive Control Approach. Journal of Mathematical Finance, 5, 83-87. doi: 10.4236/jmf.2015.52008.