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Is it a power law distribution? The case of economic contractions

  • Salvador Pueyo
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    One of the first steps to understand and forecast economic downturns is identifying their frequency distribution, but it remains uncertain. This problem is common in phenomena displaying power-law-like distributions. Power laws play a central role in complex systems theory; therefore, the current limitations in the identification of this distribution in empirical data are a major obstacle to pursue the insights that the complexity approach offers in many fields. This paper addresses this issue by introducing a reliable methodology with a solid theoretical foundation, the Taylor Series-Based Power Law Range Identification Method. When applied to time series from 39 countries, this method reveals a well-defined power law in the relative per capita GDP contractions that span from 5.53% to 50%, comprising 263 events. However, this observation does not suffice to attribute recessions to some specific mechanism, such as self-organized criticality. The paper highlights a set of points requiring more study so as to discriminate among models compatible with the power law, as needed to develop sound tools for the management of recessions.

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    Paper provided by in its series Papers with number 1310.2567.

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    Date of creation: Oct 2013
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    Handle: RePEc:arx:papers:1310.2567
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