Skip to main content

Financial structure, financial instability, and inflation targeting


Minsky, the first to propose the financial instability hypothesis, stressed the importance of the lender-of-last-resort for preventing financial instability. Overall, however, most of the research on financial instability has focused little on measures to prevent instability. Japan was trapped in a prolonged recession after the collapse of the bubble economy. The government promoted market-oriented economic reforms to cope. The recent international monetary crisis, triggered by the subprime loan crisis of 2007 in the US, cast a dark shadow over the world economy. Some developed nations, most notably New Zealand have been successful in implementing inflation-targeting policies. The Bank of Japan and the US Federal Reserve have adopted the inflation-targeting measures after the crisis. The main purpose of this paper is to examine financial instability, financial cycles, and the effects of inflation targeting in a mixed competitive–oligopolistic system. The results of this paper demonstrate that inflation targeting stabilizes an economy in both competitive and oligopolistic systems.

This is a preview of subscription content, access via your institution.


  1. New Zealand adopted an inflation-targeting policy in 1990, and other developed countries such as the UK and Canada have followed New Zealand’s example. The Reserve Bank of New Zealand and the Bank of England both set explicit inflation targets.

  2. The macroeconomics is called “new consensus macroeconomics”, It has been studied extensively by many heterodox economists. See, for example, Lavoie (2006), Rochon and Setterfield (2007), Setterfield (2009), Ninomiya (2010) and Nabeshima (2012).

  3. He assumed the rate of interest of risky asset \(i\) as follows:

    \(i = \rho + \xi (d) \equiv i(\rho ,d),\;\;\;\xi (d) \ge 0,\;\;i_{d} = \xi^{\prime}(d) > 0\;{\text{for}}\;d > 0,\;i_{d} < 0\;{\text{for}}\;d < 0 ,\)

    where \(\rho\) is nominal rate of interest of interest-bearing safe assets and d is debt–capital ratio.

    Ninomiya (2007a) formulated a macrodynamic model that incorporates dynamic equations debt burden and inflation. The “lender’s risk” of commercial banks has an important role in his model. However, he did not examine the effect of monetary policy. Ninomiya and Sanyal (2009) examined the effect of the inflation-targeting policy. However, they did not consider the financial structure.

  4. Ninomiya (2007b) and Ninomiya and Tokuda (2012) also examined the financial instability and structural change in an open economy.

  5. Dalziel (2002a) pointed out that the central banks no longer use the quantity theory of money, the cornerstone of monetarism, in practice. In other words, inflation targeting is not based on the quantity theory of money. Ninomiya (2002) examined the effect of inflation targeting in a Keynes–Goodwin model.

  6. The Bank of Japan adopted an inflation-targeting policy in 2013 and also announced new quantitative and qualitative monetary easing measures, including the doubling of high-powered money within 2 years. The x percent rule indicates a quantitative monetary easing measure without the inflation targeting. Therefore, the x percent rule is different from Friedman’s k percent rule.

  7. When \(\beta\) is large and \(\gamma\) is small, the central bank adopts an interest rate targeting policy.

  8. Rose (1969) maintained that \(i_{y} < 0\) is an important factor for ‘credit instability’. Taylor and O’Connell (1985) hypothesized that an increase in the expected profit rate reduces the interest rate. Okishio (1986) presented IS-BB analysis.

  9. The mark-up principle is written as \(p = (1 + \tau )Wn\), where \(\tau\) is the mark-up ratio. If the ratio is stable we obtain \(\pi ( \equiv \dot{p}/p) = (\dot{W}/W) + (\dot{n}/n) = (\dot{W}/W) - \sigma_{2}\).

  10. At the steady-state equilibrium, \(\dot{h}/h = 0\) and \(\dot{K}/K = \sigma\). This, in turn, can give us \(\pi^{ * } = \mu - \sigma\).

  11. The equilibrium value of y is \(y^{ * } = \sigma /s\). This is the familiar Keynesian formula. This means that the equilibrium income is the product of the long run equilibrium investment and the Keynesian multiplier (1/s). This property is exactly the same as Asada (1991).

  12. See Ninomiya (2007b) for details on this point.

  13. We think that this case is consistent with “new consensus macroeconomics”.

  14. New Zealand adopted an inflation-targeting policy and market-oriented economic reforms to cope with stagnation after the oil crisis (see Dalziel and Lattimore 2001). The stagnation was not a financial instability. However, the effect of the inflation-targeting policy is independent of the financial structure in the oligopolistic economy. Dalziel (2002b) criticized the market-oriented economic reforms. Conversely, the US adopted an explicit inflation-targeting policy just after the subprime mortgage crisis. If the financial structure of the US is fragile and the US economy is competitive, this policy could be effective.

  15. See Keen (1995), Asada (2006), Ninomiya (2007a), Ninomiya and Sanyal (2009) and Ryoo (2010).

  16. The method of the proof is based on Asada (1991) and Ninomiya (2007b).


  • Asada T (1991) On a mixed competition-monopolistic macrodynamic model in a monetary economy. J Econ 54(1):33–53

    Article  Google Scholar 

  • Asada T (2006) Inflation targeting policy in a dynamic Keynesian model with debt accumulation: a Japanese perspective. In: Chiarella C, Flaschel P, Franke R, Semmler W (eds) Quantitative and empirical analysis of nonlinear dynamic macromodels. Elsevier, Amsterdam, Tokyo, pp 517–544

    Chapter  Google Scholar 

  • Dalziel P (2002a) Triumph of Keynes: what now for monetary policy research? J Post Keynes Econ 24(4):511–527

    Article  Google Scholar 

  • Dalziel P (2002b) New Zealand’s economic reforms: an assessment. Rev Polit Econ 14(1):31–46

    Article  Google Scholar 

  • Dalziel P, Lattimore R (2001) The New Zealand macroeconomy: a briefing on the reforms. Oxford University Press, Auckland

    Google Scholar 

  • Fischer S (1972) Keynes–Wicksell and neoclassical models of money and growth. Am Econ Rev 62(5):880–890

    Google Scholar 

  • Keen S (1995) Finance and economic breakdown: modeling Minsky’s financial instability hypothesis. J Post Keynes Econ 17(4):607–635

    Article  Google Scholar 

  • Lavoie M (2006) A post-Keynesian amendment to the new consensus on monetary policy. Metroeconomica 57(2):165–192

    Article  Google Scholar 

  • Minsky HP (1986) Stabilizing an unstable economy. Yale University Press, New Haven

    Google Scholar 

  • Morishima M (1977) Walras’ economics. Cambridge University Press, Cambridge, New York

    Google Scholar 

  • Nabeshima N (2012) A critical approach of new consensus macroeconomics: a post Keynesian perspective. Polit Econ Q 48(4):75–85 (in Japanese)

    Google Scholar 

  • Ninomiya K (2002) Financial instability in a Keynes–Goodwin model. Bull Jpn Soc Polit Econ 39:103–118 (in Japanese)

    Google Scholar 

  • Ninomiya K (2005) Debt burden and monetary policy. Polit Econ Q 41(4):90–97 (in Japanese)

    Google Scholar 

  • Ninomiya K (2007a) Financial instability, cycle and income distribution in an oligopolistic economy. Rev Monet Financ Stud 24:12–25 (in Japanese)

    Google Scholar 

  • Ninomiya K (2007b) Open economy financial instability. J Korean Econ 8(2):329–355

    Google Scholar 

  • Ninomiya K (2010) Financial instability in a macroeconomic model in the short and long run: a position and an evaluation of the post Keynesians’ analysis of financial instability. Polit Econ Q 46(4):25–33 (in Japanese)

    Google Scholar 

  • Ninomiya K, Sanyal A (2009) A bubble without inflation. J Korean Econ 10(1):55–79

    Google Scholar 

  • Ninomiya K, Tokuda M (2011) Structural change and financial instability. Polit Econ Q 48(2):81–95 (in Japanese)

    Google Scholar 

  • Ninomiya K, Tokuda M (2012) Structural change and financial instability in an open economy. Korea World Econ 13(1):1–37

    Google Scholar 

  • Okishio N (1986) The movement of interest rate and exchange rate. The Kokumin Keizai Zasshi 154(6):49–69 (in Japanese)

    Google Scholar 

  • Rochon LP, Setterfield M (2007) Interest rates, income distribution, and monetary policy dominance: post Keynesians and the fair rate of interest. J Post Keynes Econ 30(1):14–42

    Google Scholar 

  • Romer D (2000) Keynesian macroeconomics without the LM curve. J Econ Perspect 14(2):149–169

    Article  Google Scholar 

  • Rose H (1969) Real and monetary factors in the business cycle. J Money Credit Bank 1(2):138–152

    Article  Google Scholar 

  • Ryoo S (2010) Long waves and short cycles in a model of endogenous financial fragility. J Econ Behav Organ 74:163–186

    Article  Google Scholar 

  • Setterfield M (2009) Macroeconomics without the LM curve: an alternative view. Camb J Econ 33(2):273–293

    Article  Google Scholar 

  • Stein JL (1969) Neoclassical and ‘Keynes–Wicksell’ monetary growth models. J Money Credit Bank 1(2):153–171

    Article  Google Scholar 

  • Stein JL (1971) Money and capacity growth. Columbia University Press, New York

    Google Scholar 

  • Taylor JB, Dalziel P (2002) Macroeconomics, New Zealand edn. Wiley, Boston, MA

    Google Scholar 

  • Taylor L, O’Connell SA (1985) A Minsky crisis. Q J Econ 100:871–886

    Article  Google Scholar 

Download references


The author is grateful to anonymous referees for the valuable comments. The author would like to extend his gratitude to the Grant-in-Aid for Scientific Research (23530325) from the Japan Society for the Promotion of Science and the Ishii Memorial Securities Research Promotion Foundation for the financial supports. Any remaining errors in this work are the responsibility of the author.

Author information

Authors and Affiliations


Corresponding author

Correspondence to Kenshiro Ninomiya.



The proof of Proposition 3

Assume that \(m_{y} < m_{y0}\) and \(\beta\) is sufficiently small, such that \(a_{2} > 0\). The proof of Proposition 1 demonstrates that \(a_{1} a_{2} - a_{3} < 0\) if \(\varepsilon\) is sufficiently small, while the proof of Proposition 2 demonstrates that \(a_{1} a_{2} - a_{3} > 0\) if \(\varepsilon\) is sufficiently large.

Given that \(a_{1} a_{2} - a_{3}\) is a smooth and continuous function with \(\varepsilon\), we find at least one value \(\varepsilon_{0}\) at which \(a_{1} a_{2} - a_{3} = 0\) and \(\partial (a_{1} a_{2} - a_{3} )/\partial \varepsilon |_{{\varepsilon = \varepsilon_{0} }} \ne 0\). Furthermore, it also follows that \(a_{2} > 0\).

One of the conditions of the Hopf bifurcation theorem is satisfied when \(a_{2} > 0\) and \(a_{1} a_{2} - a_{3} = 0\). The characteristic equation of dynamic system (\(S\)) has a pair of purely imaginary roots \(\lambda_{1} = \sqrt {a_{2} } i\) and \(\lambda_{2} = - \sqrt {a_{2} } i\) at \(\varepsilon = \varepsilon_{0}\).

From the Orlando formation, we obtain

$$a_{1} a_{2} - a_{3} = - (\lambda_{1} + \lambda_{2} )(\lambda_{2} + \lambda_{3} )(\lambda_{3} + \lambda_{1} ) = - 2h_{1} (\lambda_{3}^{2} + 2h_{1} \lambda_{3} + h_{1}^{2} + h_{2}^{2} ) ,$$

where \(h_{1}\) is the real part of two complex conjugate numbers and \(h_{2}\) is the absolute value of the imaginary part. By differentiating this equation with \(\varepsilon\), we obtain

$$\frac{{\partial (a_{1} a_{2} - a_{3} )}}{\partial \varepsilon } = - 2\left[ {\frac{{\partial h_{1} }}{\partial \varepsilon }(\lambda_{3}^{2} + 2h_{1} \lambda_{3} + h_{1}^{2} + h_{2}^{2} ) + h_{1} \frac{{\partial (\lambda_{3}^{2} + 2h_{1} \lambda_{3} + h_{1}^{2} + h_{2}^{2} )}}{\partial \varepsilon }} \right]$$

When \(h_{1} = 0\) and \(h_{2} = h\) are substituted into the above equation, we obtain

$$\frac{{\partial (a_{1} a_{2} - a_{3} )}}{\partial \varepsilon }|_{{\varepsilon = \varepsilon_{0} }} = - 2(\lambda_{3}^{2} + h^{2} )\left[ {\frac{{\partial h_{1} }}{\partial \varepsilon }|_{{\varepsilon = \varepsilon_{0} }} } \right]$$

Therefore, if

$$\frac{{\partial (a_{1} a_{2} - a_{3} )}}{\partial \varepsilon }|_{{\varepsilon = \varepsilon_{0} }} \ne 0$$


$$\frac{{\partial h_{1} }}{\partial \varepsilon }|_{{\varepsilon = \varepsilon_{0} }} \ne 0$$

From the above discussion, all of the conditions in which Hopf bifurcation occurs are satisfied at the point \(\varepsilon = \varepsilon_{0}\). Q.E.D.

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Ninomiya, K. Financial structure, financial instability, and inflation targeting. Evolut Inst Econ Rev 13, 23–36 (2016).

Download citation

  • Published:

  • Issue Date:

  • DOI:


JEL Classification