Output and Energy Prices Fluctuations in Response to Market Shocks: System Dynamic Modeling

Abstract

Regardless of the fact, whether governments of particular country implemented the strong lockdown measures to prevent the spread of COVID-19 or not, the economies of each country all over the word have been suffered considerably due to the shocks caused by the pandemic. We observed slowdown of economic activity, macroeconomic instability and shifts in consumption preferences supplemented by rising unemployment as well as significant fluctuation of demand and production capability. The research problem addressed in this paper focuses on dynamic properties of output and inflation fluctuations that occur in response to economic shocks different magnitudes and types. We use a system dynamic approach and constructs two system dynamic models to examine the dynamics of output, prices, wage and inflation. The paper indicates ranges of relevant parameters’ values that correspond with sensitivity of output to demand and production capability changes related to possibility of reaching new equilibrium point. To explore the variety of prices and wage behavior in response to shocks we evaluate distinguish possible phase diagrams associated with stable node, stable focus, circle, unstable focus and unstable node. The results is a contribution to discussion of the policy issues related to mitigation of recession caused by unpredictable and strong shocks.