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

44 Pages Posted: 27 Apr 2000 Last revised: 5 Aug 2022

See all articles by Peter Bak

Peter Bak

National Bureau of Economic Research (NBER)

Kan Chen

National Bureau of Economic Research (NBER)

José A. Scheinkman

Columbia University; Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Michael Woodford

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Date Written: December 1992

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.

Suggested Citation

Bak, Peter and Chen, Kan and Scheinkman, José and Woodford, Michael, Aggregate Fluctuations from Independent Sectoral Shocks: Self-Organized Criticality in a Model of Production and Inventory Dynamics (December 1992). NBER Working Paper No. w4241, Available at SSRN: https://ssrn.com/abstract=227052

Peter Bak

National Bureau of Economic Research (NBER)

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Kan Chen

National Bureau of Economic Research (NBER)

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José Scheinkman (Contact Author)

Columbia University ( email )

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Michael Woodford

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

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