Disequilibrium Pricing Theory—Bubbles and Recessions

Abstract

How can one track a financial bubble as a likely precursor to bank panics and subsequent recessions? We model the Minsky-Keynes depiction of a financial market—by extending the “equilibrium-price” model to a “disequilibrium-price” model, through adding a third dimension of time. In this way, we use a topological graphic approach to see how the models from the two schools of economics, exogenous and endogenous, relate to each other as complementary models of production and financial sub-systems. These economic models are partial models in an economy—not a model of the whole economy. However, such partial models can be used to anticipate financial bubbles—hence bank runs and recessions due to bank runs—which typically follow.