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

Jerome Levy Economics Institute Working Paper No. 126

28 Pages Posted: 10 Sep 1998

See all articles by Domenico Delli Gatti

Domenico Delli Gatti

Universita' Cattolica, Milano

Marco Gallegati

Università Politecnica delle Marche - Faculty of Economics

Hyman P. Minsky

Deceased

Date Written: October 1994

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.

JEL Classification: E32, E44

Suggested Citation

Delli Gatti, Domenico and Gallegati, Marco and Minsky, Hyman P., Financial Institutions, Economic Policy, and the Dynamic Behavior of the Economy (October 1994). Jerome Levy Economics Institute Working Paper No. 126. Available at SSRN: https://ssrn.com/abstract=125848 or http://dx.doi.org/10.2139/ssrn.125848

Domenico Delli Gatti (Contact Author)

Universita' Cattolica, Milano ( email )

20123 Milano
Italy
+39 02 72342499 (Phone)
+39 02 72342923 (Fax)

Marco Gallegati

Università Politecnica delle Marche - Faculty of Economics ( email )

Piazzale Martelli, 8
60121 Ancona
Italy

Hyman P. Minsky

Deceased

N/A

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