Instabilities in large economies: aggregate volatility without idiosyncratic shocks

DOI10.1088/1742-5468/2014/10/P10040zbMATH Open1456.91059arXiv1406.5022OpenAlexW3124388175MaRDI QIDQ3301776FDOQ3301776

Authors: Julius Bonart, Jean-Philippe Bouchaud, Augustin Landier, David Thesmar 

Publication date: 11 August 2020

Published in: Journal of Statistical Mechanics: Theory and Experiment (Search for Journal in Brave)

Abstract: We study a dynamical model of interconnected firms which allows for certain market imperfections and frictions, restricted here to be myopic price forecasts and slow adjustment of production. Whereas the standard rational equilibrium is still formally a stationary solution of the dynamics, we show that this equilibrium becomes linearly unstable in a whole region of parameter space. When agents attempt to reach the optimal production target too quickly, coordination breaks down and the dynamics becomes chaotic. In the unstable, "turbulent" phase, the aggregate volatility of the total output remains substantial even when the amplitude of idiosyncratic shocks goes to zero or when the size of the economy becomes large. In other words, crises become endogenous. This suggests an interesting resolution of the "small shocks, large business cycles" puzzle.

Full work available at URL: https://arxiv.org/abs/1406.5022

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Mathematics Subject Classification ID

Economic dynamics (91B55)

Cites Work

• Nonlinear oscillations, dynamical systems, and bifurcations of vector fields
• On the nature of turbulence
• Crises and collective socio-economic phenomena: simple models and challenges
• The network origins of aggregate fluctuations
• The Granular Origins of Aggregate Fluctuations
• Complex dynamics in learning complicated games
• Statistical models for company growth
• Generalised central limit theorems for growth rate distribution of complex systems

Cited In (4)

• Out-of-equilibrium dynamics and excess volatility in firm networks
• Price dynamics, financial fragility and aggregate volatility
• On the emergence of scale-free production networks
• Big shocks versus small shocks in a dynamic stochastic economy with many interacting agents

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