Social Networks and Macroeconomic Stability

Abstract

Abstract In this paper, the effect of the social network on macroeconomic stability is examined using an agent-based, network-based DSGE (dynamic stochastic general equilibrium) model. While the authors’ primitive (first-stage) examination has the network generation mechanism as its main focus, their more in-depth second-stage analysis is based on a few main characteristics of network topologies, such as the degree, clustering coefficient, length, and centrality. Based on their econometric analysis of the simulation results, the authors find that the betweenness centrality contributes to the GDP instability and average path length contributes to the inflation instability. These results are robust under two augmentations, one taking into account nonlinearity and one taking into account the shape of the degree distribution as an additional characteristic. Through these augmentations, the authors find that the effect of network topologies on economic stability can be more intriguing than their baseline model may suggest: in addition to the existence of non-linear or combined effects of network characteristics, the shape of the degree distribution is also found to be significant.