2007/02 LEM Working Paper Series

Production Structure and Economic Fluctuations

Tommaso Ciarli, Marco Valente
Production structure, micro- and macro-volatility, simulation models

  JEL Classifications
E32, E37, C63, C67, D57

We aim at contributing to the debate on the mechanisms and properties of economic fluctuations. We consider a crucial aspect among many thought to influence this ubiquitous and extremely relevant phenomenon: the interaction structure that characterises the organisation of production, that is, the production relation among sectors of a system. We build — and simulate — a very simple model representing an input–output system where sectors/firms adapt production and desired levels of stocks. Their output serves both an exogenous final demand and the intermediate demand solicited by the other sectors of the system. Series of simulation runs allow to derive relevant and non–obvious conclusions concerning the levels and, more importantly, the volatility of economic activity, as an outcome of the same, inherent, economic structure. We claim that the results that we obtain through the highly abstract representation we use, provide useful intuitions on the working of economic cycles, to be later integrated by further studies. As a by–product of our analysis, we also suggest that the methodology we adopt can provide valuable insights by allowing a detailed analysis of the time path generated in the artificial systems, and therefore assessing with precisions the same mechanisms that affect real– world systems. The natural following step, left for further research, is to investigate how those mechanisms are empirically generated.

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