New Look on Macro-Finance Modeling
21 Pages Posted: 2 Jun 2016 Last revised: 9 Dec 2016
Date Written: June 1, 2016
This paper models macro-finance on economic space alike to description of multi-particle systems. We treat economic agents as simple units of macro-finance system and use their risk ratings as their coordinates on economic space. Financial variables of separate economic agents are defined as functions of time and coordinates on economic space. Aggregation of financial variables of separate economic agents with coordinates near point x on economic space define macro-financial variables at function of x. Evolution and mutual dependence between macro-financial variables is described by hydrodynamic like equations. As example, for simple model of mutual dependence between macro-financial Demand on Investment and Interest Rate we derive hydrodynamic-like equations in a closed form. Perturbations of macro financial variables can generate waves those propagate on economic space and we derive wave equations. Macro financial waves can propagate on economic space with exponential growth of amplitude and that cause fluctuations of financial variables and can induce financial crises. Existence of macro financial wave processes on economic space gives new look on internal dynamics of macro finance system and uncovers hidden complexity of macro financial modeling and forecasting.
Keywords: [Macro-Finance Modeling, Risk Ratings, Economic Space, Wave Equations
JEL Classification: C00, C02, C10, E00
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