A Critical Assessment of Economic Crises Resulting in the Design of a Macroeconomic Framework

Hillig, Ariane (2016). A Critical Assessment of Economic Crises Resulting in the Design of a Macroeconomic Framework. MRes thesis The Open University.

DOI: https://doi.org/10.21954/ou.ro.0000efa5


According to Minsky, capitalism has an inherent tendency to financial instability: periods of boom are followed by financial crash. Thus, economic policies have to be proactive. For any economy, it is necessary at each point in time to assess the degree of potential instability, and the particular role played by monetary and fiscal policy. The purpose of this dissertation is to draw on Minsky’s theory and examine economic policy’s role in the formulation of a real estate bubble. With the help of a historical case study, this research examines how exogenous factors such as economic policies and endogenous factors such as positive expectations contribute to financial fragility. The case study chosen is that of Spain prior to 2007, where rising financial instability culminated in the eventual bursting of a pronounced housing bubble. A quantitative descriptive analysis supported by a qualitative document review are chosen to provide an in-depth picture. It is shown that exogenous policy factors contributed to the crisis trigger and helped to exacerbate the boom. After introduction of the Euro single currency, profit opportunities arose, based on interest rate and growth differentials, leading to capital inflows from the European centre and rising fragility. Procyclical fiscal and monetary policy amplified positive expectations and further fuelled the housing bubble.

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