Why Macroeconomic Price Indices are Sluggish in Large Economies ?

Summary

Two new reasons are discussed for sluggish behavior of macroeconomic variables such as price indices.

One is slow spread of the news of microeconomic idiosyncratic shocks in the economy, when the economy is organized into tree structures of heterogeneous subgroups or clusters of agents or goods. Clusters are not symmetrically treated, but the concept of ultrametric distances measure disparities or similarities of clusters.

Another is the effects of uncertainties that affect decision processes, such as about the cost surfaces, or about the shapes of cost landscapes which may have many local minima which are not known precisely. Effectiveness of many search algorithm is reduced in the face of this kind of uncertainty. Flat cost landscapes, called entropic barriers, are discussed as an example.

For some other aspects of uncertainty, see Aoki, Yoshikawa, and Shimizu (2002).