ABSTRACT
The financial instability hypothesis is an alternative to the neo-classical synthesis, that is to today's standard economic theory. The financial instability hypothesis has policy implications that go beyond the simple rules for monetary and fiscal policy that are derived from the neo-classical synthesis. The financial instability hypothesis is a variant of post-Keynesian economics. In the interpretation of Keynes used in the neo-classic synthesis the liquidity preference function is interpreted as a demand for money function. Keynes' General Theory viewed the progress of the economy as a cyclical process; his theory allowed for transitory states of moderate unemployment and minor inflations as well as serious inflations and deep depressions. The financial instability hypothesis is rooted in the analysis of the two sets of prices that exist in capitalism, those of current output, which reflect short run or current considerations, and those of capital assets which reflect long run expectations.
