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Economic Transactions Govern Business Cycles

Olkhov, Victor (2018): Economic Transactions Govern Business Cycles.

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Abstract

This paper presents the business cycle model based on treatment of economic agents as simple units of macroeconomics. Agents (banks, corporations, households, etc.) have numerous economic and financial variables like Assets, Credits, Debts, Consumption, etc. Agents perform economic and financial transactions with other agents. All agents are at risk but not for all agents risk assessments are performed now. Let’s propose that risk assessment can be made for all agents and let’s use agents risk ratings x as their coordinates. Agents coordinates for n risks define n-dimensional economic space. Economic and financial transactions between agents describe evolution of their economic and financial variables. Aggregations of economic or financial variables of agents in a unit volume at point x determine macro variables as functions of x. Aggregations of transactions between agents in unit volumes at points x and y determine macro transactions as functions of x and y. Macro transactions describe rate of change of macro variables at points x and y. We derive economic equations that describe evolution of macro transactions. We show that business cycle fluctuations are consequence of these equations. We argue that business cycle fluctuations of particular macro variable can be treated as oscillations of “mean risk coordinates” of this economic variable. As example we study the business cycle determined by model interactions between transactions CL(t,x,y) that provide Loans from Creditors at point x to Borrowers at point y and transactions LR(t,x,y) that describe repayments from Borrowers at point y to Creditors at point x. Starting with economic equations we derive the system of ordinary differential equations that describe the business cycle fluctuations of macro Credits C(t) and macro Loan-Repayments LR(t) of the entire economics.

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