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We study a dynamical model of interconnected firms which allows for certainmarket imperfections and frictions, restricted here to be myopic priceforecasts and slow adjustment of production. Whereas the standard rationalequilibrium is still formally a stationary solution of the dynamics, we showthat this equilibrium becomes linearly unstable in a whole region of parameterspace. When agents attempt to reach the optimal production target too quickly,coordination breaks down and the dynamics becomes chaotic. In the unstable,"turbulent" phase, the aggregate volatility of the total output remainssubstantial even when the amplitude of idiosyncratic shocks goes to zero orwhen the size of the economy becomes large. In other words, crises becomeendogenous. This suggests an interesting resolution of the "small shocks, largebusiness cycles" puzzle.

Instabilities in large economies: aggregate volatility without idiosyncratic shocks