Maximum entropy model for business cycle synchronization

Abstract

The global economy is a complex dynamical system, whose cyclical fluctuations can mainly be characterized by simultaneous recessions or expansions of major economies. Thus, the researches on the synchronization phenomenon are key to understanding and controlling the dynamics of the global economy. Based on a pairwise maximum entropy model, we analyze the business cycle synchronization of the G7 economic system. We obtain a pairwise-interaction network, which exhibits certain clustering structure and accounts for 45% of the entire structure of the interactions within the G7 system. We also find that the pairwise interactions become increasingly inadequate in capturing the synchronization as the size of economic system grows. Thus, higher-order interactions must be taken into account when investigating behaviors of large economic systems.