Through the study's analysis with background to theories and previous research, it turns out that financial instability is hidden in boom and economic stability. Where causes are speculation, optimism, risk-taking and credit expansion. Minsky (1982a) pointed out, among other things, that high debt ratio increases the risk of financial instability, which is an effect of the lavish lending, partly as a result of global financing. The purpose of this study is to investigate whether there was a state of financial instability prior to Sweden's crises, focusing on Sweden's three most recent crises: the financial crisis of 1990, the IT bubble of 2000 and the financial crisis of 2008. The study illustrates how Minsky's financial instability hypothesis that "stability breeds instability" also can explain the emergence of Swedish crises. The result shows that there is a clear link between increased debt before crises. / Genom studiens analys med bakgrund till teorier och tidigare forskning visar det sig att finansiell instabilitet döljer sig i högkonjunktur och ekonomisk stabilitet. Där orsaker som ligger till grund är spekulation, optimism, risktagning och kreditexpansion. Minsky (1982a) pekade bland annat på att hög skuldkvot ökar risken för finansiell instabilitet, något som är en effekt av den frikostiga kreditgivningen, bland annat som en följd av den globala finansieringen. Syftet med denna studie är att undersöka om där funnits ett tillstånd av finansiell instabilitet innan Sveriges kriser, med fokus på Sveriges tre senaste kriser: finanskrisen 1990, it-bubblan 2000 och finanskrisen 2008. Studien åskådliggör hur Minskys finansiella instabilitetshypotes om att "stability breeds instability" även kan förklara uppkomsten av svenska kriser. Resultatet visar på att det finns ett tydligt samband mellan ökad skuldsättning innan kriser.

Hyman Minsky’s Financial Instability Hypothesis is used to construct two different indices for financial instability: a long-term index (Long Term Financial Instability) and a short-term index (Short Term Financial Instability). The former focuses on the underlying fragility of financial structures of units in the economy while the latter focuses on more immediate developments and manages to follow turmoil – “a financial crisis” – in the economy. The interplay of the indices with each other, with economic growth and with Foreign Direct Investment, both in general and in the financial industry, is probed. In short, we find that long term financial stability, i.e. secure financial structures in the economy or a low level of Long Term Financial Instability, is sacrificed for maintaining short term financial stability. However, more Long Term Financial Instability is associated, as Minsky expected, with more fluctuations in Short Term Financial Instability: market turmoil is more common the more fragile underlying financial structures of units in the economy are. This signals that markets are ruled by short-termism. Economic growth is harmed by Short Term Financial Instability but the effects of Long Term Financial Instability are weaker. The common expectation that FDI activities strengthen financial stability is not confirmed. The relationship found hints rather in the opposite direction: FDI activities seem to cause financial instability. Based on the those investigations and a further empirical work using data from Iceland, Leigh Harkness’s Optimum Exchange Rate System (OERS) is developed further with the intention of solving “The Policy Problem” as described by Minsky. Insights from control theory are used. The OERS, along with public debt management as carried out by Keynes, is argued to have the ability to keep economic activity in the state of a permanent “quasi-boom”. The policy implications are that the OERS should be considered as a monetary policy as it permits a free flow of capital, thereby allowing economies to reap the possible positive benefits of foreign direct investment, while still conserving financial stability.

The phenomenal financial expansion of the last decades has been characterised by an exacerbation of systemic instability and an increase in the frequency of financial crises, culminating in the recent meltdown in the US financial sector. The literature on financial crises has developed concomitantly, but despite a large number of papers written on this subject, economists are still struggling to understand the underlying determinants of these phenomena. In this dissertation, I argue that one of the reasons for this apparent failure is the way agents, as well as the environment in which they evolve, are modelled in this literature. After reviewing the existing literature on international financial crises, I outline an alternative framework, drawing from Post-Keynesian and Behavioural insights. In this framework, international financial crises are seen as being a direct consequence of the way agents formulate expectations in an environment of fundamental uncertainty and the investment and financial decisions they subsequently take. I argue that the psychological heuristics agents use in formulating expectations under fundamental uncertainty can lead to decisions which fragilise the economy and can thus be conducive to financial crises. I then apply this framework to the study of the 2000-2001 financial crisis in Turkey, which is notorious for not lending itself easily to explanations based on the existing theoretical literature on international financial crises. After outlining the crisis and reviewing the main existing accounts, I identify two moments prior to the crisis: A phase of increasing financial fragility, lasting from a previous crisis in 1994 to 1999, and a financial bubble in 2000 during the implementation of an IMF stabilisation program, partly predicated on the previous increase in financial fragility. My framework can account for both periods; it fits particularly well the first one and enhances the explanatory content of existing stories about the events that took place in 2000.

本文以Minsky金融不穩定假說 (Financial Instability Hypothesis) 為基礎，闡述Minsky對於資本經濟不穩定現象的理論，並且對於Minsky強調不穩定情況下的大政府 (Big Government) 做一更詳細的說明。 金融不穩定假說反應著資本經濟體系的不穩定是一種內生、而且是常態的現象，透過制度結構的改變、法令與經濟單位的外生性反應將經濟維持在穩定的狀況。不穩定的情況始於對經濟前景的過份樂觀態度，隨著危機記憶的過去，風險趨避的態度也逐漸消逝，融通態度變得更為投機，因此提升經濟發生不穩定的機率。 在不穩定一蹴可幾的情形下，Minsky認為，唯有大政府的存在，適當的介入不穩定危機中，不穩定情況才能逐漸趨緩。大政府的存在是透過政府赤字的利潤效果、政府公債的資產負債效果，以及移轉性支付的所得效果來穩定金融、經濟的不穩定。因此，本文以台灣在民國87~88年間發生的金融危機為例，為Minsky的假說做一驗證。實證結果顯示，支持Minsky的假說，並且政府在驗證期間內，的確發揮上述的三效果。

Thesis advisor: Harold Petersen / According to the Efficient Market Hypothesis (EMH), speculative bubbles do not exist and are impossible. We disagree. If prices are the only observable component of an asset’s value, and they themselves are an aggregated consensus of perceived value, then what about the Efficient Market Hypothesis (EMH) is testable? Rather than assume that prices always reflect value (i.e. perfect market efficiency), we maintain that markets are efficient to the extent that one can be confident that tomorrow’s prices will not diverge dramatically or arbitrarily from today’s prices, absent significant new information. Speculative bubbles are not materializing every day, every month, or even every year. But they do have the potential and indeed a tendency to occur from time to time. If markets are efficient, what explains all the trading? Rather than assume rational expectations and a homogenous investor class, we assume four investor classes that diverge in their perception of value (i.e. in their expectation of future returns) and thus trade with each other. Using insights from Hyman Minsky’s Financial Instability Hypothesis (FIH), we develop a theoretical framework for how a speculative bubble might materialize within a modern capitalist economy with securities markets’ that follow a random walk. Obviously, there is no “bubble” variable. We use Tobin’s Q, the ratio of the price of an asset to its replacement cost, and Shiller’s cyclically adjusted P/E ratio as proxy variables for bubbles. We find statistically significant, negative relationships between both of these proxy variables and our dependent variable, Ten Year Cumulative Returns, thereby providing evidence against the EMH and suggesting the possibility of speculative bubbles. / Thesis (BA) — Boston College, 2014. / Submitted to: Boston College. College of Arts and Sciences. / Discipline: Economics Honors Program. / Discipline: Economics.