Fluctuation in a Multi-region Economic Network

Abstract

A multi-regional economic network model is constructed to describe open economic systems. The model is used to study the strength of fluctuation in such open economic systems. We find a hidden feedback mechanism in the economic network. In comparison with the corresponding closed system, the open system has positive feedback, and thereby suffers stronger fluctuation if the open system gains from a positive trade balance. On the contrary, the open system turns into a negative feedback system, and thereby enjoys weaker fluctuation if the open system suffers from a negative trade balance. Furthermore, we find a negative correlation between openness and fluctuation, which conforms to the empirical result obtained by Romer. This negative correlation between openness and fluctuation is explained by the hidden feedback mechanism.