Crisis propagation in a heterogeneous self-reflexive DSGE model

Area of Science:

• Economics
• Sociology
• Network Science

Background:

• Economic recessions disproportionately affect various societal strata.
• Income inequality and social network structures play crucial roles in economic dynamics.

Purpose of the Study:

• To characterize the impact of economic recessions on different societal strata.
• To analyze the combined effects of income inequalities and confidence feedback via heterogeneous social networks.

Main Methods:

• Development of a self-reflexive Dynamic Stochastic General Equilibrium (DSGE) model.
• Simulation of crisis typologies by varying model parameters.
• Analysis of confidence feedback within heterogeneous social networks.

Main Results:

• Identified distinct crisis typologies based on confidence propagation within high or low-income households.
• Demonstrated that segregated networks exacerbate crisis severity due to stronger cascading contagion effects.
• Found that larger income inequalities can reduce the probability of global crises.

Conclusions:

• The study reproduces counter-intuitive empirical findings: higher Gini coefficients correlate with lower consumption drops for low-income households during crises.
• Network segregation and income inequality significantly shape recession impacts.
• Policy interventions should consider social network structures and income distribution.