Instabilities in large economies: aggregate volatility without idiosyncratic shocks

Bonart, Julius, Bouchaud, Jean-Philippe, Landier, Augustin and Thesmar, David (2014) Instabilities in large economies: aggregate volatility without idiosyncratic shocks. Journal of Statistical Mechanics: Theory and Experiment, 2014.

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Official URL: http://tse-fr.eu/pub/28817

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.

Item Type: Article
Language: English
Date: October 2014
Refereed: Yes
Uncontrolled Keywords: critical phenomena of socio-economic systems, nonlinear dynamics, dynamics of supply and production networks
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 16 Mar 2015 14:53
Last Modified: 07 Mar 2018 13:23
OAI ID: oai:tse-fr.eu:28817
URI: http://publications.ut-capitole.fr/id/eprint/16641

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