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Aggregate Fluctuations from Independent Sectoral Shocks: Self-Organized Criticality in a Model of Production and Inventory Dynamics

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Peter Bak
Kan Chen
Jose Scheinkman
Michael Woodford

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Abstract

This paper illustrates how fluctuations in aggregate economic activity can result from many small, independent shocks to individual sectors. The effects of the small independent shocks fail to cancel in the aggregate due to the presence of two non-standard assumptions: local interaction between productive units (linked by supply relationships), and non-convex technology. We also argue that neither feature on its own would suffice. In the case of a simple model, we explicitly calculate the distribution of aggregate activity in the limit of an infinite number of independently disturbed sectors.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4241.

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Date of creation: Dec 1992
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Handle: RePEc:nbr:nberwo:4241

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  1. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February. [Downloadable!] (restricted)
  2. Jovanovic, Boyan, 1987. "Micro Shocks and Aggregate Risk," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 395-409, May. [Downloadable!] (restricted)
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  3. Cooper, Russell & Haltiwanger, John, 1993. "The Aggregate Implications of Machine Replacement: Theory and Evidence," American Economic Review, American Economic Association, vol. 83(3), pages 360-82, June. [Downloadable!] (restricted)
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  4. Timothy F. Bresnahan & Valerie A. Ramey, 1992. "Output Fluctuations at the Plant Level," NBER Working Papers 4105, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November. [Downloadable!] (restricted)
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  6. Blinder, Alan S & Maccini, Louis J, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 73-96, Winter. [Downloadable!] (restricted)
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  1. Domenico Delli Gatti & Mauro Gallegati & Bruce C. Greenwald & Alberto Russo & Joseph E. Stiglitz, 2008. "Financially Constrained Fluctuations in an Evolving Network Economy," NBER Working Papers 14112, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Rama Cont & Jean-Philippe Bouchaud, 1997. "Herd behavior and aggregate fluctuations in financial markets," Science & Finance (CFM) working paper archive 500028, Science & Finance, Capital Fund Management. [Downloadable!]
  3. Noell, Christian, 2006. "Self-Organization in Agricultural Sectors and the Relevance of Complex Systems Approaches for Applied Economics," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25516, International Association of Agricultural Economists. [Downloadable!]
  4. Xavier Gabaix, 2009. "The Granular Origins of Aggregate Fluctuations," NBER Working Papers 15286, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Alex Coad, 2006. "Towards an Explanation of the Exponential Distribution of Firm Growth Rates," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00113346_v1, HAL. [Downloadable!]
  6. Rama CONT & Jean-Philippe BOUCHAUD, 1997. "Herd behavior and aggregate fluctuations in financial markets," Finance 9712008, EconWPA, revised 30 Dec 1997. [Downloadable!]
  7. Eric Friedman & Simon Johnson & Adam Landsberg, 2001. "Large-Scale Synchrony, Global Interdependence and Contagion," Departmental Working Papers 200103, Rutgers University, Department of Economics. [Downloadable!]
  8. R. Andergassen & F. Nardini & M. Ricottilli, 2008. "Innovation and growth through local and global interaction," Working Papers 637, Dipartimento Scienze Economiche, Universita' di Bologna. [Downloadable!]
    Other versions:
  9. Alex Coad, 2006. "Towards an explanation of the exponential distribution of firm growth rates," Cahiers de la Maison des Sciences Economiques r06025, Université Panthéon-Sorbonne (Paris 1). [Downloadable!]
  10. Higson, C. & Holly, S. & Kattuman, P. & S. Platis, 2001. "The Business Cycle, Macroeconomic Shocks and the Cross Section: The Growth of UK Quoted Companies," Cambridge Working Papers in Economics 0114, Faculty of Economics, University of Cambridge. [Downloadable!]
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  11. John Duffy & Andreas Blume & Ted Temzelides, 2006. "Self-Organized Criticality in a Dynamic Game," Working Papers 276, University of Pittsburgh, Department of Economics, revised Aug 2008. [Downloadable!]
  12. Fabrizio Lillo & Giovanni Bonanno & Rosario N. Mantegna, 2001. "Variety of Stock Returns in Normal and Extreme Market Days: The August 1998 Crisis," Quantitative Finance Papers cond-mat/0104362, arXiv.org. [Downloadable!]
  13. Xavier Gabaix, 2004. "Power laws and the origins of aggregate fluctuations," Econometric Society 2004 North American Summer Meetings 484, Econometric Society. [Downloadable!]
  14. Edward L. Glaeser & Jose A. Scheinkman, 2001. "Non-Market Interactions," Harvard Institute of Economic Research Working Papers 1914, Harvard - Institute of Economic Research. [Downloadable!]
    Other versions:
  15. Randal J. Verbrugge, 1998. "A Framework for Studying Economic Interactions (with applications to corruption and business cycles)," Game Theory and Information 9809006, EconWPA, revised 01 Oct 1998. [Downloadable!]
  16. Randal J. Verbrugge, 1998. "Local Complementarities and Aggregate Fluctuations," Macroeconomics 9809016, EconWPA, revised 30 Sep 1998. [Downloadable!]
  17. D'Ignazio, A. & Giovannetti, E., 2004. "From Exogenous to Endogenous Networks: Internet Applications," Cambridge Working Papers in Economics 0445, Faculty of Economics, University of Cambridge. [Downloadable!]
  18. Steven N. Durlauf, 1996. "Statistical Mechanics Approaches to Socioeconomic Behavior," NBER Technical Working Papers 0203, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. Domenico Delli Gatti & Mauro Gallegati & Bruce Greenwald & Alberto Russo & Joseph Stiglitz, 2009. "Business fluctuations and bankruptcy avalanches in an evolving network economy," Journal of Economic Interaction and Coordination, Springer, vol. 4(2), pages 195-212, November. [Downloadable!] (restricted)
  20. Eric J. Friedman & Simon Johnson & A.S. Landsberg, . "The Emergence of Correlations in Studies of Global Economic Inter-dependence and Contagion," Claremont Colleges Working Papers 2002-35, Claremont Colleges. [Downloadable!]
  21. Tommaso Ciarli & Marco Valente, 2007. "Production Structure and Economic Fluctuations," LEM Papers Series 2007/02, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy. [Downloadable!]
  22. Carolina Castaldi & Giovanni Dosi, 2007. "The patterns of output growth of firms and countries: new evidence on scale invariances and scale specificities," LEM Papers Series 2007/14, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy. [Downloadable!]
  23. Makoto Nirei, 2004. "Lumpy Investment, Sectoral Propagation, and Business Cycles," Computing in Economics and Finance 2004 330, Society for Computational Economics. [Downloadable!]
    Other versions:
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