A Learning Model of Financial Instability

Thu, 01 Jan 2026 00:00:00 +0000

Research question and motivation: Williams asks whether the recurrent boom-bust dynamics of Minsky’s financial instability hypothesis — “periods of stability lead to periods of instability” — can arise endogenously from a tractable rational-agent model in which investors learn about asset returns. This matters because standard rational-expectations asset-pricing models cannot generate the high, volatile price-dividend ratios, sizeable risk premia, and recurrent crashes seen in data, and because Minsky’s narrative has long lacked a clean formal mechanism. The paper’s main contribution is theoretical (a new instability/limit-cycle result for adaptive learning), with a secondary quantitative exercise.

Noah Williams | Macro Paper Warehouse

A Learning Model of Financial Instability