HEC Research Papers Series,
HEC Paris

Abstract: The authors 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, the authors 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.

Keywords: volatility of aggregate output; network theory; rational expectations; general equilibrium

22 pages, June 20, 2014

Full text files

papers.cfm?abstract_id=2456936  

Download statistics

• HEC Paris
• Ordering Working Papers
• Home page for this series

Questions (including download problems) about the papers in this series should be directed to Antoine Haldemann ()
Report other problems with accessing this service to Sune Karlsson ().

RePEc:ebg:heccah:1052This page generated on 2024-09-13 22:19:53.