Economic dynamics with financial fragility and mean-field interaction: a model

TL;DR

This paper applies statistical mechanics methods to macroeconomic models, providing analytical solutions to Greenwald and Stiglitz's models by representing the economy as a complex system of interacting heterogeneous agents.

Contribution

It introduces a mean-field interaction approach and master equation techniques to analytically solve macroeconomic models with financial fragility.

Findings

Analytical closed-form solutions for macroeconomic models.

Representation of the economy as a complex system with heterogeneous agents.

Overcoming the aggregation problem in macroeconomic modeling.

Abstract

Following the statistical mechanics methodology, firstly introduced in macroeconomics by Aoki [1996,2002], we provide some insights to the well known works of Greenwald and Stiglitz [1990, 1993]. Specifically, we reach analytically a closed form solution of their models overcoming the aggregation problem. The key idea is to represent the economy as an evolving complex system, composed by heterogeneous interacting agents, that can partitioned into a space of macroscopic states. This meso level of aggregation permits to adopt mean field interaction modeling and master equation techniques.