ABSTRACT
Hyman P. Minsky was an early proponent of the integration of the central bank into a policy strategy oriented toward achieving stable full employment. He conceptualized capitalism as a dynamic but unstable economic system, and he called the dynamics at the heart of this system the Financial Instability Hypothesis. The latter provides a view of the capitalist economic system that turns out to be very useful to understand the role that should be given to a central bank. The previous chapters of this book have argued that financial considerations should be the main preoccupation of a central bank. The latter should foster prudent financial behaviors, should manage aggregate financial stability, and should intervene to prevent the spreading of liquidity crises. What follows combines the Minskian framework with some of the hypotheses laid out in chapters 2 and 3, in order to reinforce the conclusions that have been reached regarding the role of a central bank. This is done first by reviewing the framework developed by Minsky and its critiques and extensions by different authors. It will be shown that any good formalization or empirical testing of the Minskian framework must be aware of several important hypotheses and dynamics. In a second part of the chapter, a stock-flow consistent model (Godley and Lavoie 2007; Dos Santos 2005; Godley and Shaikh 1998) is combined with System Dynamics (Sterman 2000) in order to capture some elements of the Minskian framework, and in order to draw some conclusions about the role of the central bank in the management of the economic system.
