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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

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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  • Peter Bak & Kan Chen & Jose Scheinkman & Michael Woodford, 1992. "Aggregate Fluctuations from Independent Sectoral Shocks: Self-Organized Criticality in a Model of Production and Inventory Dynamics," NBER Working Papers 4241, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:4241
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