First-passage time for stability analysis of the Kaldor model

Abstract

Every economic model should include an estimate of its stability and predictability. A new measure, the first passage time (FPT) which is defined as the time period when the model error first exceeds a pre-determined criterion (i.e., the tolerance level), is proposed here to estimate the model predictability. A theoretical framework is developed to determine the mean and variance of FPT. The classical Kaldor model is taken as an example to show the robustness of using FPT as a quantitative measure for identifying the model stability.