Per Bak, Kan Chen, José Scheinkman, Michael Woodford

Paper #: 92-04-018

Frequent and sizable fluctuations in aggregate economic activity can result from many small independent perturbations in different sectors of the economy. No exogenous cataclysmic force is needed to create large catastrophic events. This behavior is demonstrated within a “toy” model of a large interactive economy. The model self-organizes to a critical state, in which the fluctuations of economic activity are given by a stable Pareto-Levy distribution.