Financial Fluctuations and Fragility

Abstract

Recent years have witnessed rapid financial sector liberalization, pronounced asset price fluctuations and costly episodes of financial fragility. Neoclassical economic analysis stresses the beneficial effects of financial market de-regulation and laissez-faire whilst post-Keynesian analysis highlights the inherent tendency of de-regulated financial markets to lead to financial instability. This paper reviews the contribution which these perspectives make to understanding the substantial asset price fluctuations of recent years and the specific development of the banking industries of the United States, Japan and three Nordic countries. The paper demonstrates that the post-Keynesian financial instability hypothesis contributes much to understanding these episodes of financial fragility whilst inappropriate regulation has also been a cause. Future policy should give a higher weighting to the pursuit of financial stability.