Econophysics of Business Cycles: Aggregate Economic Fluctuations, Mean Risks and Mean Square Risks

TL;DR

This paper introduces a hydrodynamic-like model of business cycles, representing macroeconomic variables as evolving functions over economic space, capturing fluctuations and risks through differential equations.

Contribution

It develops a novel hydrodynamic-like framework for modeling aggregate economic fluctuations and risks based on agent interactions in economic space.

Findings

Derived equations for fluctuations of aggregate assets and risks.

Demonstrated model relations between assets and revenue-on-assets.

Showed how economic space interactions induce business cycle fluctuations.

Abstract

This paper presents hydrodynamic-like model of business cycles aggregate fluctuations of economic and financial variables. We model macroeconomics as ensemble of economic agents on economic space and agent's risk ratings play role of their coordinates. Sum of economic variables of agents with coordinate x define macroeconomic variables as functions of time and coordinates x. We describe evolution and interactions between macro variables on economic space by hydrodynamic-like equations. Integral of macro variables over economic space defines aggregate economic or financial variables as functions of time t only. Hydrodynamic-like equations define fluctuations of aggregate variables. Motion of agents from low risk to high risk area and back define the origin for repeated fluctuations of aggregate variables. Economic or financial variables on economic space may define statistical moments like mean risk, mean square risk and higher. Fluctuations of statistical moments describe phases of financial and economic cycles. As example we present a simple model relations between Assets and Revenue-on-Assets and derive hydrodynamic-like equations that describe evolution and interaction between these variables. Hydrodynamic-like equations permit derive systems of ordinary differential equations that describe fluctuations of aggregate Assets, Assets mean risks and Assets mean square risks. Our approach allows describe business cycle aggregate fluctuations induced by interactions between any number of economic or financial variables.