Metastable Features of Economic Networks and Responses to Exogenous Shocks

TL;DR

This paper models economic networks using an Ising-based approach to identify a minimum demand shock threshold needed to exit recession, highlighting the importance of timing and network structure in economic stimulus effectiveness.

Contribution

It introduces a metastable feature analysis of economic networks, revealing a universal minimum demand shock bound for recovery and emphasizing the timing of interventions.

Findings

Minimum demand shock bound is about 0.44 times GDP gap.

In Watts-Strogatz networks, the bound is independent of average degree.

Early stimulation during a 'golden time passage' can lower the required shock.

Abstract

It has been proved that network structure plays an important role in addressing a collective behaviour. In this paper we consider a network of firms and corporations and study its metastable features in an Ising based model. In our model, we observe that if in a recession the government imposes a demand shock to stimulate the network, metastable features shape its response. Actually we find that there is a minimum bound where demand shocks with a size below it are unable to trigger the market out from recession. We then investigate the impact of network characteristics on this minimum bound. We surprisingly observe that in a Watts-Strogatz network though the minimum bound depends on the average of the degrees, when translated into the economics language, such a bound is independent of the average degrees. This bound is about $0.44 \Delta$GDP, where $\Delta$GDP is the gap of GDP between recession and expansion. We examine our suggestions for the cases of the United States and the European Union in the recent recession, and compare them with the imposed stimulations. While stimulation in the US has been above our threshold, in the EU it has been far below our threshold. Beside providing a minimum bound for a successful stimulation, our study on the metastable features suggests that in the time of crisis there is a "golden time passage" in which the minimum bound for successful stimulation can be much lower. So, our study strongly suggests stimulations to be started within this time passage.