TITLE:
Disequilibrium Systems Representation of Growth Models—Harrod-Domar, Solow, Le-ontief, Minsky, and Why the U.S. Fed Opened the Discount Window to Money-Market Funds
AUTHORS:
Frederick Betz
KEYWORDS:
Money-Market Funds, Fed, Business-Cycles
JOURNAL NAME:
Modern Economy,
Vol.6 No.12,
December
8,
2015
ABSTRACT: One of the intriguing
puzzles from the Global Financial Crisis of 2007-08 was this one: To save the U.S.
economy, why did the U.S. Federal Reserve System (under the chair, Ben Bernanke)
open its central bank discount window to the unregulated money-market funds?
The discount window of a central bank is usually only open to legitimate banks;
and money-market funds are not banks. But the action proved correct, and the
crisis slipped into an economic recession and not a depression. Yet how can one
theoretically explain Bernanke’s economic reasoning underlying this critical decision?
For explanation of that event, we integrate several traditional economic
models: 1) the growth models of Harrod-Domar and of Solow, 2) the
production-consumption model of Leontief, and 3) Minsky’s price-disequilibrium
model. The integration of these models is methodologically possible through a
system dynamics representation of the algebraic forms of the traditional economic
models. In a system dynamics model, economic flows become explicit, as well as
do the connections between institutions. In this explanation, we see evidence for
the economic postulate that: it is financial crises which trigger depressions
and not production business-cycles. Production business-cycles trigger
recessions.