On the complete instability of empirically implemented dynamic Leontief models

On theoretical grounds, real world implementations of forward-looking dynamic Leontief systems were expected to be stable. Empirical work, however, showed the opposite to be true: all investigated systems proved to be unstable. In fact, an extreme form of instability ('complete instability') appeared to be the rule. In contrast to this, backward-looking models and dynamic inverse versions appeared to be exceptionally stable. For this stability-instability switch a number of arguments have been put forward, none of which was convincing. Dual (in)stability theorems only seemed to complicate matters even more. In this paper we offer an explanation. We show that in the balanced growth case--under certain conditions--the spectrum of eigenvalues of matrix D equivalent to (I - A)-1B, where A stands for the matrix of intermediate input coefficients and B for the capital matrix, will closely approximate the spectrum of a positive matrix of rank one. From this property the observed instability properties are easily derived. We argue that the employed approximations are not unrealistic in view of the data available up to now

Microeconomic Structure determines Macroeconomic Dynamics. Aoki defeats the Representative Agent

Masanao Aoki developed a new methodology for a basic problem of economics: deducing rigorously the macroeconomic dynamics as emerging from the interactions of many individual agents. This includes deduction of the fractal / intermittent fluctuations of macroeconomic quantities from the granularity of the mezo-economic collective objects (large individual wealth, highly productive geographical locations, emergent technologies, emergent economic sectors) in which the micro-economic agents self-organize. In particular, we present some theoretical predictions, which also met extensive validation from empirical data in a wide range of systems: - The fractal Levy exponent of the stock market index fluctuations equals the Pareto exponent of the investors wealth distribution. The origin of the macroeconomic dynamics is therefore found in the granularity induced by the wealth / capital of the wealthiest investors. - Economic cycles consist of a Schumpeter 'creative destruction' pattern whereby the maxima are cusp-shaped while the minima are smooth. In between the cusps, the cycle consists of the sum of 2 'crossing exponentials': one decaying and the other increasing. This unification within the same theoretical framework of short term market fluctuations and long term economic cycles offers the perspective of a genuine conceptual synthesis between micro- and macroeconomics. Joining another giant of contemporary science - Phil Anderson - Aoki emphasized the role of rare, large fluctuations in the emergence of macroeconomic phenomena out of microscopic interactions and in particular their non self-averaging, in the language of statistical physics. In this light, we present a simple stochastic multi-sector growth model.Comment: 42 pages, 6 figure

Assessing Economic Complexity with Input-Output Based Measures

Economic complexity can be defined as the level of interdependence between the component parts of an economy. In input-output systems, intersectoral connectedness is a crucial feature of analysis, and there are many different methods for measuring it. Most of the measures, however, have drawbacks that prevent them from being used as a good indicator of economic complexity, because they were not explicitly made with this purpose in mind. In this paper, we present, discuss and compare empirically different indexes of economic complexity as intersectoral connectedness, using the interindustry tables of several OECD countries.input-output analysis; intersectoral connectedness; economic complexity

A New Kind of Production Multiplier for Assessing the Scale and Structure Effects of Demand Shocks in Input-Output Frameworks

The main purpose of this paper is to develop a new kind of input-output multiplier that would be particularly well suited to quantifying the impacts of final demand changes on the sectoral output growth potential of an economy. Instead of using the traditional output multipliers, solving an appropriate optimization problem provides what can be called input-output Euclidean distance multipliers. This method does not impose unitary final demand shocks with a fixed (predetermined) structure, allowing the “IO economy” to change across the spectrum of all possible structures. It can be very helpful in measuring interindustry linkages and key sectors in a national or regional economy. An empirical illustration is made, using national (Spain and Portugal) and regional (Balearic Islands and the Azores) input-output data.input-output analysis; ultra-peripheral regions; structural change

May's Instability in Large Economies

Will a large economy be stable? Building on Robert May's original argument for large ecosystems, we conjecture that evolutionary and behavioural forces conspire to drive the economy towards marginal stability. We study networks of firms in which inputs for production are not easily substitutable, as in several real-world supply chains. Relying on results from Random Matrix Theory, we argue that such networks generically become dysfunctional when their size increases, when the heterogeneity between firms becomes too strong or when substitutability of their production inputs is reduced. At marginal stability and for large heterogeneities, we find that the distribution of firm sizes develops a power-law tail, as observed empirically. Crises can be triggered by small idiosyncratic shocks, which lead to "avalanches" of defaults characterized by a power-law distribution of total output losses. This scenario would naturally explain the well-known "small shocks, large business cycles" puzzle, as anticipated long ago by Bak, Chen, Scheinkman and Woodford