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MANILA, Philippines — Economic expansions are often sustained by the steady expansion of credit. As banks lend and businesses borrow, investment rises, construction activity increases, and productive capacity expands. For long periods, this relationship between credit and investment can appear stable and self-reinforcing.
But there are moments when the pattern begins to shift. Credit may continue to expand even as investment activity slows, which raises an important question about how borrowing is being used within the economy.
One of the most influential explanations comes from economist Hyman Minsky, who developed the Financial Instability Hypothesis. According to Minsky, borrowing largely finances productive investment in the early phase of the cycle. Businesses take loans to build factories and expand operations. But as the expansion matures, borrowing increasingly shifts toward less productive uses. Credit may be used to refinance existing debts or finance consumption rather than new investment.
READ: PH at risk of first credit downgrade since 2005
