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Working Paper No. 450 | May 2006

Extending Minsky's Classifications of Fragility to Government and the Open Economy

Minsky's classification of fragility according to hedge, speculative, and Ponzi positions is well-known. He wrote about fragile positions of individual firms and of the economy as a whole, with the economy transitioning naturally from a robust financial structure (dominated by hedge units) to a fragile structure (dominated by speculative units). In most of Minsky's writing, he introduced government through its impact on the private sector with its spending and balance sheet operations as stabilizing forces (although he insisted that stability is ultimately destabilizing). On a few occasions he also analyzed the government's own balance sheet position. More rarely, Minsky extended his analysis to the open economy, examining the fragility of external debt positions. In these works, he analyzed the United States as the "world's bank" and discussed the impact of various US balance sheet positions on the rest of the world. This paper will carefully examine Minsky's position on these topics, and will offer an extension of Minsky's work. It will also examine the "sustainability" of the current "twin US deficits."
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