Munich Personal RePEc Archive

Methods of Economic Theory: Variables, Transactions and Expectations as Functions of Risks

Olkhov, Victor (2019): Methods of Economic Theory: Variables, Transactions and Expectations as Functions of Risks.

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Abstract

This paper develops methods and framework of economic theory free from general equilibrium tools and assumptions. We model macroeconomics as system of agents those perform transactions with other agents under action of numerous expectations. Agents expectations are formed by economic and financial variables, transactions, expectations of other agents, other factors that impact macro economy. We use risk ratings of agents as their coordinates on economic domain and approximate description of economic variables, transactions and expectations of numerous separate agents by density functions of variables, transactions and expectations of aggregated agents on economic domain. Motion of separate agents on economic domain due to change of agents risk rating produce economic flows of variables, transactions and expectations. These risk flows define dynamics of economic variables and disturb any supposed market equilibrium states all the time. Permanent evolution of market supply-demand states due to risk flows makes general equilibrium concept too doubtful. As example we apply our methods to model assets pricing and return fluctuations.

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