Non-Local Macroeconomic Transactions and Credits-Loans Surface-Like Waves

TL;DR

This paper models macroeconomic credit and loan transactions as surface-like waves on economic space, using hydrodynamic equations to analyze how shocks can generate propagating waves and instabilities affecting macro stability.

Contribution

It introduces a novel hydrodynamic-like framework to describe macroeconomic transaction waves on economic space based on agents' risk ratings.

Findings

Surface-like waves can propagate along risk borders.

Perturbations can grow exponentially, causing macro instabilities.

Model provides insights into macro transaction distributions and shock effects.

Abstract

This paper describes surface-like waves of macroeconomic Credits-Loans transactions on economic space. We use agent's risk ratings as their coordinates and describe evolution of macro variables by transactions between agents. Aggregations of agent's variables with risk coordinates x on economic space define macro variables as function of x. Aggregations of transactions between agents at point x and y determine functions of two variables (x,y) on economic space. As example we study Credits transactions provided from agents at point x to agents at point y and thus amount of Loans received by agents at point y from agents at point x at moment t during time term dt. We model evolution of macro transactions by hydrodynamic-like equations. Agents fill macro domain on economic space that is bounded by minimum risk ratings of most secure and maximum risk ratings of most risky agents. Economic and financial shocks can disturb steady borders of macro domain and cause perturbations of transactions. Such disturbances can generate waves that can propagate along risk borders alike to surface waves in fluids. As example, we describe simple model interactions between two transactions by hydrodynamic like equations in a closed form. We introduce notions of "macro accelerations" and their potentials that establish steady state distributions of transactions on economic space. For this model in linear approximation we describe surface-like waves and show that perturbations induced by surface-like waves can exponentially grow up inside macro domain and induce macro instabilities in a low risk area. Description of possible steady state distributions of transactions and surface-like waves on economic space might be important for macro modeling and policy-making.