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Business fluctuations in a credit-network economy

  • Domenico Delli Gatti
  • Mauro Gallegati
  • Bruce Greenwald
  • Alberto Russo
  • Joseph E. Stiglitz

We model a network economy with three sectors: downstream firms, upstream firms, and banks. Agents are linked by productive and credit relationships so that the behavior of one agent influences the behavior of the others through network connections. Credit interlinkages among agents are a source of bankruptcy diffusion: in fact, failure of fulfilling debt commitments would lead to bankruptcy chains. All in all, the bankruptcy in one sector can diffuse to other sectors through linkages creating a vicious cycle and bankruptcy avalanches in the network economy. Our analysis show how the choices of credit supply by both banks and firms are interrelated. While the initial impact of monetary policy is on bank behaviour, we show the interactive play between the choices made by banks, the choices made by firms in their role as providers of credit, and the choices made by firms in their role as producers.

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File URL: http://arxiv.org/pdf/1006.3521
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Paper provided by arXiv.org in its series Papers with number 1006.3521.

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Date of creation: Jun 2010
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Publication status: Published in Physica A: Statistical Mechanics and its Applications, Vol: 370, Issue: 1, 1 October 2006, pp: 68-74
Handle: RePEc:arx:papers:1006.3521
Contact details of provider: Web page: http://arxiv.org/

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  1. Alan P. Kirman, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-136, Spring.
  2. Bak, Per & Chen, Kan & Scheinkman, Jose & Woodford, Michael, 1993. "Aggregate fluctuations from independent sectoral shocks: self-organized criticality in a model of production and inventory dynamics," Ricerche Economiche, Elsevier, vol. 47(1), pages 3-30, March.
  3. repec:cup:cbooks:9780521008051 is not listed on IDEAS
  4. Gatti, Domenico Delli & Guilmi, Corrado Di & Gaffeo, Edoardo & Giulioni, Gianfranco & Gallegati, Mauro & Palestrini, Antonio, 2005. "A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility," Journal of Economic Behavior & Organization, Elsevier, vol. 56(4), pages 489-512, April.
  5. Bottazzi, Giulio & Secchi, Angelo, 2003. "Why are distributions of firm growth rates tent-shaped?," Economics Letters, Elsevier, vol. 80(3), pages 415-420, September.
  6. repec:cup:cbooks:9780521810340 is not listed on IDEAS
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