New Essentials of Economic Theory I. Assumptions, Economic Space and Variables

Olkhov, Victor (2019): New Essentials of Economic Theory I. Assumptions, Economic Space and Variables.

Abstract

This paper develops economic theory framework free from general equilibrium assumptions. We describe macroeconomics as system of economic agents under action of n risks. Economic and financial variables of agents, their expectations and transactions between agents define macroeconomic variables. Agents variables depend on transactions between agents and transactions are performed under agents expectations. Agents expectations are formed by economic variables, transactions, expectations of other agents, other factors that impact macroeconomic evolution. We use risk ratings of agents as their coordinates on economic space and approximate description of economic and financial variables, transactions and expectations of numerous separate agents by description of variables, transactions and expectations as density functions on economic space. We describe evolution of macroeconomic density functions of variables, transactions and expectations and their flows induced by motion of separate agents on economic space due to change of agents risk rating. We apply our model to description of business cycles, present models of wave propagation for disturbances of economic variables and transactions, model asset price fluctuations and argue hidden complexities of classical Black-Scholes-Merton option pricing.

• Item Type: MPRA Paper
• Language: English
• Keywords: Economic Theory, Risk Ratings, Economic Space, Economic Flows, Density Functions
• Subjects: C - Mathematical and Quantitative Methods > C0 - General > C02 - Mathematical Methods; E - Macroeconomics and Monetary Economics > E0 - General > E00 - General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; G - Financial Economics > G0 - General; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

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