Peter Klimek quantifies economic resilience

Austrian complexity researcher knows how stable the economy is

Economic and financial crisis are extremely costly, yet our understanding of the resilience of economies is only in its infancy. In general, Klimek says, resilience is typically understood as a system’s ability to absorb, withstand and also recover from adverse events. The characterization of economic resilience is particularity challenging due to string interdependences between different industries and the way they absorb and recover from production shocks.

In his research, Peter developed for the first time a quantitative, predictive, and data-driven formalism for the resilience of economies based on linear response theory (LRT). Key to this formalism is Leontief’s input-output model that depicts inter-industry relationships within an economy. “We show how the impacts of production shocks in specific industries can be analytically derived from small-scale fluctuations observed in the input-output model using LRT”, says Peter. “For each industry sector in 43 different countries, we can compute its time-dependent response to different kinds of shocks in any other sector. A central result of this framework is the derivation of resilience curves for each sector with respect to shocks in any other sector.” The so-derived resilience curves are shown to be predictive for, both, the average growth of and fluctuations in the output in a given country. “Furthermore, we show that the impact of sector-specific demand shocks on the entire economy can also be understood and to some extend predicted from these curves.”

The predictions are shown to be particularly accurate when the framework is applied to the financial crisis in 2008.

The work by Klimek and his colleagues establishes a firm and novel link between the out-of-equilibrium behavior of severely disrupted economies and their steady-state fluctuations.