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.

Share and Cite:

Betz, F. (2015) 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. Modern Economy, 6, 1189-1208. doi: 10.4236/me.2015.612113.

Conflicts of Interest

The authors declare no conflicts of interest.


[1] Solow, R.M. (1956) A Contribution to the Theory of Economic Growth. The Quarterly Journal of Economics, 70, 65-94. http://www.jstor.org/stable/1884513
[2] Van den Berg, H. (2013) Growth Theory after Keynes, Part I: The Unfortunate Suppression of the Harrod-Domar Model. The Journal of Philosophical Economics, 7, 2-28.
[3] Forrester, J. (1961) Industrial Dynamics. MIT Press, Cambridge, Massachusetts.
[4] Boianovsky, M. and Hoover, K.D. (2009) The Neoclassical Growth Model and 20th Century Economics. History of Political Economy, 41, 1-23.
[5] Leontief, W. (1986) Input-Output Economics. 2nd Edition, Oxford University Press, Oxford.
[6] Irwin, N. (2013) The Alchemists: Three Central Bankers and a World on Fire. Kindle Edition, Penguin Publishing Group, New York, 149.
[7] Nocera, J. (2009) Lehman Had to Die So Global Finance Could Live. New York Times, September 11. http://www.nytimes.com/2009/09/12/business/12nocera.html
[8] Minsky, H.P. (1982) Can “It” Happen Again? Essays on Instability and Finance. M.E. Sharpe Inc.
[9] Stewart, J.B. (2009) Eight Days: The Battle to Save the American Financial System. The New Yorker, September 21.
[10] Betz, F. (2014) Disequilibrium Pricing Theory—Bubbles and Recessions. Theoretical Economics Letters, 4, 60-67.
[11] Fisher, I. (1933) The Debt-Deflation Theory of the Great Depression. Econometrica, October.
[12] McCulley, P. (2007) Teton Remarks. http://web.archive.org/web/20091124124300/
[13] Borio, C. (2014) Macro Prudential Policy and the Financial Cycle, Some Stylized Facts and Policy Suggestions. In: Akerlof, G.A., Blanchard, O.J., Romer, D. and Stiglitz, J.E., Eds., What Have We Learned, International Monetary Fund and the Massachusetts Institute of Technology, Cambridge, Massachusetts.
[14] Bernanke, B. (2015) The Courage to Act: A Memoir of a Crisis and its Aftermath. W.W. Norton and Company, New York.
[15] Bernanke, B. (2002) Deflation: Making Sure “It” Doesn’t Happen Here. Remarks by Governor Ben S. Bernanke at the National Economists Club, Federal Reserve System, Washington DC. http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm
[16] Borio, C. (2014) Monetary Policy and Financial Stability: What Role in Prevention and Recovery? Monetary and Economic Department, Bank for International Settlements, BIS Working Papers No. 440.

Copyright © 2023 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.