Minsky’s Banking Model

Minsky’s Banking Model explores how banks and borrowers interact within the economy, illustrating how financial stability can lead to instability. Banks lend money based on the assumption that borrowers will repay, and borrowers invest expecting future profits. When optimism prevails, borrowing and lending increase, fueling economic growth. However, if lenders become cautious or borrowers default, confidence drops, causing a credit crunch. This cycle can trigger financial crises, as unsteady borrowing and lending patterns spread uncertainty. The model emphasizes that financial markets tend to oscillate between stability and instability, driven by changing perceptions and risk assessments.