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© National Institute of Economic and Social Research 2019

Why are Economies Unstable? Research Project

An Interactions-based Macroeconomic Model

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Principal Co-Investigator: Maxim Gusev

Maxim Gusev is a lead researcher in advanced quantitative strategies at LGT Capital Partners. Maxim obtained his MS in physics (1993) and PhD in theoretical physics (1995) from Moscow State University and completed his post-doctoral research at Universidad Autónoma de Madrid in 1996. Maxim was a researcher at Moscow State University during 1997-1998.

Principal Co-Investigator: Dimitri Kroujiline

Dimitri Kroujiline is a lead researcher in advanced quantitative strategies at LGT Capital Partners. Dimitri received his MS in physics (1991) from Moscow State University, as well as MS in applied mathematics (1994) and PhD in geophysics (1998) from Harvard University. Dimitri was a post-doctoral fellow at Harvard University during 1998-1999.

Project Summary

The traditional approach in economics and finance does not model the interactions between people. Yet, this approach does not fully explain certain observations, especially those related to emergent phenomena (i.e. moving between expansion and contraction in the economy, and between bull and bear markets in finance). When economic interactions between people are made explicit, an extra level of detail between the micro and macro levels is added. This makes the link between the micro and macro properties nontrivial. Can methods from statistical mechanics and dynamical systems help describe these interactions and give us insights into macroeconomic instability?

Decision making involves both independent thinking and exchange of opinions via interactions with others. By taking into account interaction among agents, we may do a better job at capturing source of instability (see an overview by Lux, 2009). For example, interactions may lead small disturbances to have much larger consequences for the economy. An example of this sort of amplification was of course the sub-prime crisis leading to the Global Financial Crisis.

To investigate this, we aim to derive a tractable interactions-based macroeconomic model from microfoundations to shed light on the sources of instability. This approach will extend the modeling framework, developed for the stock market in Gusev et al. (2015), to the general economy.

Results

Results will be published here when available.