Financial instabilty in developing countries: an intersectoral analysis

Abstract This paper discusses elements that contribute to financial instability in developing countries, evaluating incentive mechanisms that condition the behavior of different economic sectors over the cycles. Minsky’s financial fragility hypothesis is used as a theoretical reference, in addition to an analysis of structural constraints that accentuate the fragility of this group of countries, related to their position in global commercial and financial systems, in an environment marked by freedom of capital movements. From the stylized balance and main financial intersectoral relations in an open economy, it is observed that different domestic sectors tend to present procyclical behavior, increasing their vulnerability in periods of growth, despite the different objectives of the public and private sectors. We highlight the relevance of instruments that provide the State with margins of maneuver for countercyclical policy actions, in order to reduce collateral effects from fluctuations in international capital flows.