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Aggregate fluctuations from independent sectoral shocks: self-organized criticality in a model of production and inventory dynamics

  • Bak, Per
  • Chen, Kan
  • Scheinkman, Jose
  • Woodford, Michael

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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File URL: http://www.sciencedirect.com/science/article/B6WWV-4DBJ9RS-2/2/0589ee8402e97fbbc4220204bb919ba7
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Article provided by Elsevier in its journal Ricerche Economiche.

Volume (Year): 47 (1993)
Issue (Month): 1 (March)
Pages: 3-30

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Handle: RePEc:eee:riceco:v:47:y:1993:i:1:p:3-30
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622941

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  1. Jovanovic, Boyan, 1987. "Micro Shocks and Aggregate Risk," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 395-409, May.
  2. Scheinkman, Jose A, 1990. "Nonlinearities in Economic Dynamics," Economic Journal, Royal Economic Society, vol. 100(400), pages 33-48, Supplemen.
  3. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
  4. Timothy F. Bresnahan & Valerie A. Ramey, 1992. "Output Fluctuations at the Plant Level," NBER Working Papers 4105, National Bureau of Economic Research, Inc.
  5. 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.
  6. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  7. 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.
  8. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, June.
  9. Alan S. Blinder & Louis J. Maccini, 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.
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