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Financial Institutions, Economic Policy, and the Dynamic Behavior of the Economy

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  • Domenico Delli Gatti
  • Mauro Gallegati
  • Hyman P. Minsky

Abstract

Schumpeter asserted that there were two types of business cycle theories: one in which cycles reflected dampened economic behavior and another in which cycles reflect explosive economic behavior. Both of these theories allowed that cycles could be either monotonic or oscillating. In this working paper, Domenico Delli Gatti, Mauro Gallegati, and Levy Institute Distinguished Scholar Hyman P. Minsky expand the alternative types of theory to three by adding one in which cycles reflect nonoscillating time series, wavelike motions, and incoherent behavior, such as those witnessed in times of runaway inflation and debt deflations. In Gatti, Gallegati, and Minsky's business cycle theory, "cycles result from the combination of endogenous interactions that can lead to incoherence" and the effects of institutions to contain these tendencies in the economy. The authors construct an accelerator-multiplier model that reflects the idea that "times series that can generate smooth growth and well-behaved cycles as possible transitory results of the economic process, but that also allow for intermittent conditions conducive to the emergence of incoherence or turbulence." This turbulence, however, can be contained by institutional factors that act as circuit breakers on the economy. Whenever institutionally determined values dominate endogenously determined values, the path of the economy is broken and an interactive process, which starts with new initial conditions, generates future values. Specifically, whenever the economy threatens to behave incoherently, these stabilizers, whether built-in or activated by government authority, prevent the economy from continuing on the prior determined path.

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Bibliographic Info

Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_126.

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Date of creation: Oct 1994
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Handle: RePEc:lev:wrkpap:wp_126

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  1. Gatti, D. Delli & Gallegati, M. & Gardini, L., 1993. "Investment confidence, corporate debt and income fluctuations," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 22(2), pages 161-187, October.
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Citations

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Cited by:
  1. Claudio Dos Santos, 2004. "Keynesian Theorizing During Hard Times: SStock-Flow Consistent Models as an Unexplored 'Frontier' of Keynesian Macroeconomics'," Macroeconomics, EconWPA 0405023, EconWPA.
  2. K. Vela Velupillai, 2010. "The 'Minsky Moment' - A Critique and a Re-construction," ASSRU Discussion Papers, ASSRU - Algorithmic Social Science Research Unit 1009, ASSRU - Algorithmic Social Science Research Unit.
  3. Claudio H. Dos Santos, 2004. "A Stock-Flow Consistent General Framework for Minskyan Analysis of Closed Economics," Macroeconomics, EconWPA 0402028, EconWPA.
  4. Claudio H. Dos Santos, 2004. "Keynesian Theorizing During Hard Times: Stock-Flow Consistent Models as an Unexplored 'Frontier' of Keynesian Macroeconomics," Method and Hist of Econ Thought, EconWPA 0406001, EconWPA.
  5. Dimitri B. Papadimitriou & L. Randall Wray, 2000. "Minsky's Analysis of Financial Capitalism," Macroeconomics, EconWPA 0004022, EconWPA.
  6. Carl Chiarella & Corrado Di Guilmi, 2010. "The Financial Instability Hypothesis:a Stochastic Microfoundation Framework," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 273, Quantitative Finance Research Centre, University of Technology, Sydney.
  7. Claudio Dos Santos & Gennaro Zezza, 2004. "A Post-Keynesian Stock-Flow Consistent Macroeconomic Growth," Macroeconomics, EconWPA 0402027, EconWPA.
  8. repec:hal:wpaper:hal-00574136 is not listed on IDEAS
  9. Christine Sinapi, 2011. "Institutional Prerequisites of Financial Fragility within Minsky's Financial Instability Hypothesis: A Proposal in Terms of 'Institutional Fragility'," Economics Working Paper Archive, Levy Economics Institute wp_674, Levy Economics Institute.
  10. Nishimura, Kiyohiko G. & Nakajima, Takanobu & Kiyota, Kozo, 2005. "Does the natural selection mechanism still work in severe recessions?: Examination of the Japanese economy in the 1990s," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 58(1), pages 53-78, September.
  11. Claudio H. dos Santos & Gennaro Zezza, 2004. "A Post-Keynesian Stock-Flow Consistent Macroeconomic Growth Model: Preliminary Results," Economics Working Paper Archive, Levy Economics Institute wp_402, Levy Economics Institute.
  12. Thomas I. Palley, 2009. "A Theory of Minsky Super-Cycles and Financial Crises," IMK Working Paper 05-2009, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  13. Claudio H. dos Santos, 2004. "Keynesian Theorizing During Hard Times: Stock-Flow Consistent Models as an Unexplored "Frontier" of Keynesian Macroeconomics," Economics Working Paper Archive, Levy Economics Institute wp_408, Levy Economics Institute.
  14. Fazzari, Steven & Ferri, Piero & Greenberg, Edward, 2008. "Cash flow, investment, and Keynes-Minsky cycles," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 65(3-4), pages 555-572, March.
  15. Charles J. Whalen, 1999. "Hyman Minsky's Theory of Capitalist Development," Economics Working Paper Archive, Levy Economics Institute wp_277, Levy Economics Institute.
  16. Eugenio Caverzasi, 2014. "Minsky and the Subprime Mortgage Crisis: The Financial Instability Hypothesis in the Era of Financialization," Economics Working Paper Archive, Levy Economics Institute wp_796, Levy Economics Institute.
  17. Claudio dos Santos, 2004. "A Stock-Flow Consistent General Framework for Formal Minskyan Analyses of Closed Economies," Economics Working Paper Archive, Levy Economics Institute wp_403, Levy Economics Institute.
  18. Saoussen Ben Gamra & Dominique Plihon, 2007. "Qualité Des Institutions, Libéralisation Et Crises Bancaires Le Cas Des Pays Émergents," CEPN Working Papers, HAL hal-00574136, HAL.

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