Financially Constrained Fluctuations in an Evolving Network Economy
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.
|Date of creation:||Jun 2008|
|Date of revision:|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bruce C. Greenwald & Joseph E. Stiglitz, 1993.
"Financial Market Imperfections and Business Cycles,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 108(1), pages 77-114.
- Bruce C. Greenwald & Joseph E. Stiglitz, 1988. "Financial Market Imperfections and Business Cycles," NBER Working Papers 2494, National Bureau of Economic Research, Inc.
- Allen, Franklin & Gale, Douglas, 1998.
98-33, C.V. Starr Center for Applied Economics, New York University.
- Furfine, Craig H, 2003. " Interbank Exposures: Quantifying the Risk of Contagion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 111-28, February.
- Bernanke, B. & Gertler, M. & Gilchrist, S., 1998.
"The Financial Accelerator in a Quantitative Business Cycle Framework,"
98-03, C.V. Starr Center for Applied Economics, New York University.
- Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
- Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
- Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2008.
"Network models and financial stability,"
Bank of England working papers
346, Bank of England.
- Gaffeo, Edoardo & Gallegati, Mauro & Palestrini, Antonio, 2003. "On the size distribution of firms: additional evidence from the G7 countries," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 117-123.
- Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000.
"Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 32(3), pages 611-38, August.
- Xavier Freixas & Bruno Parigi & Jean-Charles Rochet, 2000. "Systemic risk, interbank relations, and liquidity provision by the central bank," Proceedings, Federal Reserve Bank of Cleveland, pages 611-640.
- X. Freixas & B. Parigi & J-C. Rochet, 2000. "Systemic Risk, Interbank Relations and Liquidity Provision by theCentral Bank," DNB Staff Reports (discontinued) 47, Netherlands Central Bank.
- Freixas, Xavier & Parigi, Bruno & Rochet, Jean-Charles, 1999. "Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank," CEPR Discussion Papers 2325, C.E.P.R. Discussion Papers.
- Xavier Freixas & Bruno Parigi & Jean Charles Rochet, 1998. "Systemic risk, interbank relations and liquidity provision by the Central Bank," Economics Working Papers 440, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 1999.
- Iori, Giulia & Jafarey, Saqib & Padilla, Francisco G., 2006. "Systemic risk on the interbank market," Journal of Economic Behavior & Organization, Elsevier, vol. 61(4), pages 525-542, December.
- 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,"
Elsevier, vol. 47(1), pages 3-30, March.
- Peter Bak & Kan Chen & Jose Scheinkman & Michael Woodford, 1992. "Aggregate Fluctuations from Independent Sectoral Shocks: Self-Organized Criticality in a Model of Production and Inventory Dynamics," NBER Working Papers 4241, National Bureau of Economic Research, Inc.
- Ben Bernanke & Mark Gertler, 1990.
"Financial Fragility and Economic Performance,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 105(1), pages 87-114.
- Domenico Delli Gatti & Mauro Gallegati & Bruce Greenwald & Alberto Russo & Joseph E. Stiglitz, 2010.
"Business fluctuations in a credit-network economy,"
- Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Russo, Alberto & Stiglitz, Joseph E., 2006. "Business fluctuations in a credit-network economy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 370(1), pages 68-74.
- Michael Boss & Helmut Elsinger & Martin Summer & Stefan Thurner, 2004. "Network topology of the interbank market," Quantitative Finance, Taylor & Francis Journals, vol. 4(6), pages 677-684.
- Bottazzi, Giulio & Secchi, Angelo, 2003. "Why are distributions of firm growth rates tent-shaped?," Economics Letters, Elsevier, vol. 80(3), pages 415-420, September.
- 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.
- Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
- Gabrielle Demange & Wooders Myrna, 2005. "Group Formation in Economics: Networks, Clubs and Coalitions," Post-Print halshs-00576778, HAL.
- Boissay, Frédéric, 2006. "Credit chains and the propagation of financial distress," Working Paper Series 0573, European Central Bank.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:14112. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.