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Abstract

We present a stochastic dynamic model which can explain economic cycles. We show that the macroscopic description yields a complex dynamical landscape consisting of multiple stable fixed points, each corresponding to a split of the population into a large low and a small high income group. The stochastic fluctuations induce switching between the resulting metastable states and excitation oscillations just below a deterministic bifurcation. The shocks are caused by the decisions of a few agents who have a disproportionate influence over the macroscopic state of the economy due to the unequal distribution of wealth among the population. The fluctuations have a long-term effect on the growth of economic output and lead to business cycle oscillations exhibiting coherence resonance, where the correlation time is controlled by the population size which is inversely proportional to the noise intensity.