Global recessions as a cascade phenomenon with heterogenous, interacting agents

TL;DR

This paper models global recessions as a cascade process across a network of heterogeneous economies, successfully replicating observed recession patterns using a small world topology and agent-based modeling.

Contribution

It introduces a novel agent-based model with heterogeneous thresholds and network connections to simulate the spread of recessions across countries.

Findings

Recession durations follow an exponential distribution.

The model accurately replicates the distribution of the number of countries in recession.

Network structure is crucial for reproducing stylized facts.

Abstract

I examine global recessions as a cascade phenomenon. In other words, how recessions arising in one or more countries might percolate across a network of connected economies. A heterogeneous agent based model is set up in which the agents are Western economies. A country has a probability of entering a recession in any given year and one of emerging from it the next. In addition, the agents have a unique threshold propensity to import a recession from the agents with which they have the strongest connections. They are connected on a small world topology, and an agent's neighbours at any time are either in (state 1) or out (state 0) of recession. If the weighted sum exceeds the threshold, the agent goes into recession. Annual real GDP growth for 17 Western countries 1871-2006 is used as the data set. The distribution of the number of countries in recession in any given year is exponential, as is the duration of recessions within individual countries. The model is calibrated against these two facts, plus the 'wait time' between recessions. It is able to replicate them successfully. The network structure is essential for the agents to replicate the stylised facts. The country-specific probabilities of entering and emerging from recession by themselves give results very different to the actual data.