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

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.