From the Financial Instability Hypothesis to the theory of Capital Market Inflation: a structural interpretation of the sub-prime crisis

The aim of this paper is to develop a structural explanation of the subprime mortgage crisis, grounded on the combination of two apparently incompatible financial theories: the Financial Instability Hypothesis by Hyman P. Minsky and the theory of Capital Market Inflation by Jan Toporowski. The theoretical analysis - presented in the first part of the paper - will then be reproduced in a Stock Flow Consistent model, to test its coherence, both logical and with respect to stylized facts in the U.S. economy.