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Explaining the Financial Instability Hypothesis with Endogenous Investment: A Nonlinear Model Predictive Control Approach

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DOI: 10.4236/jmf.2015.52008    2,763 Downloads   3,430 Views   Citations

ABSTRACT

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.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

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.

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