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MINSKY'S MODEL, FINANCIAL DISTRESS
When the will to purchase…
MINSKY'S MODEL
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THE LIFE CYCLE OF A FINANCIAL BUBBLE:
from Mania, to Panic, to Crisis
STEP 2: EUPHORIA
When displacement is convincing, euphoria is created. This step works like a cycle: higher demand→higher
prices→higher profits→more investments→even higher demand. This creates a boom. Investors and lenders are increasingly less cautious.
STEP 3: OVERTRADING & BUBBLES
Overtrading → Bubble: investors speculate by buying assets to resell them at higher prices. Overconfidence makes
them believe prices will keep rising, creating an irrational bubble supported by rapid debt growth.
STEP 1: DISPLACEMENT
A displacement is a positive shock, innovation or change that creates new profit opportunities. It can come from
exogenous events and it changes expectations. Investors become interested because they believe they can earn higher
profits. To be considered a displacement, the event must be sufficiently large and persuasive.
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FINANCIAL DISTRESS
When the will to purchase decreases, indebted firms are unable to fulfill debts obligations. Financial distress is related
to the international crisis.
According to Aliber Kindleberger - Manias, Panics, and Crashes- A History of Financial Crises
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