Financial Instability Under Innovation Development: Reasons and Regulation Within the Model of Evolutionary Processes

Ch. 6. P. 137–153.

Ichkitidze Y.

In this paper, we suggest an approach to the study of the financial instability based on the model of evolutionary processes. In the first place, we present some empirical facts that confirm that the stock’s price dynamics is better described by the Markov switching model rather than by the pure random walk. Further, using the equilibrium model of price formation, we show that the temporary price trends on stock market are evolutionary processes that occur in the conditions of a duality of the equilibrium between the market price and the fair value. Then, within the framework of the constructed model, we analyze the causes of the financial market instability and its impact on the real sector, and show how the financial markets create a destructive impulse under the economic growth slowdown, and therefore adversely affect the process of innovations diffusion into the market. The conducted study shows that the causes of the financial instability are the capital concentration in the narrow circles of society and the lack of investment opportunities, as compared with the available financial resources, whereas the symptoms are frequently recurring financial bubbles and crises.

Keywords: cycles, analysis of structural shifts, bifurcation, evolutionary processes, economic dynamics, multiple equilibria, feedback effects, Macroeconomic evolution, сyclical changes, Markov switching

In book

Industry 4.0: Entrepreneurship and Structural Change in the New Digital Landscape

Springer, 2017.