We explore the properties of a credit network characterized by inside credit - i.e. credit relationships connecting downstream (D) and upstream (U) firms - and outside credit - i.e. credit relationships connecting firms and banks. The structure of the network changes over time due to the preferred-partner choice rule: each agent chooses the partner who charges the lowest price. The net worth of D firms turns out to be the driver of fluctuations. U production, in fact, is determined by demand of intermediate inputs on the part of D firms and production of the latter is financially constrained, i.e. determined by the availability of internal finance proxied by net worth. The output of simulations shows that at the macroeconomic level a business cycle can develop as a consequence of the complex interaction of the agents' financial conditions. We can also reproduce the main stylized facts of firms' demography, i.e. the power law distribution of firms' size and the Laplace distribution of firms' growth rates.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
14112.
Length: Date of creation: Jun 2008 Date of revision: Handle: RePEc:nbr:nberwo:14112
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Find related papers by JEL classification: E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
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Franklin Allen & Douglas Gale, 2001.
"Financial Contagion,"
Journal of Political Economy,
University of Chicago Press, vol. 108(1), pages 1-33, February.
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Allen, Franklin & Gale, Douglas, 1998.
"Financial Contagion,"
Working Papers
98-33, C.V. Starr Center for Applied Economics, New York University.
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