JMF  Vol.5 No.2 , May 2015
Explaining the Financial Instability Hypothesis with Endogenous Investment: A Nonlinear Model Predictive Control Approach
ABSTRACT
This study reveals endogenous instability in the financial market based on the dynamic interaction between endogenous investment behavior and debt in a nonlinear framework, by using a nonlinear model predictive control (NMPC) approach. It is found that when the debt ratio is below a critical threshold, increased debt has a positive effect on investment. On the other hand, when the debt ratio is above that threshold, growing financial stress and greater debt become a drag on investment, leading to an economic downturn and an outbreak of financial crisis. The paper provides theoretical support for Minsky’s financial instability hypothesis.

Cite this paper
Chong, T. , Cebula, R. , Peng, F. and Foley, M. (2015) Explaining the Financial Instability Hypothesis with Endogenous Investment: A Nonlinear Model Predictive Control Approach. Journal of Mathematical Finance, 5, 83-87. doi: 10.4236/jmf.2015.52008.
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