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The Origins of Aggregate Fluctuations in a Credit Network Economy

Author

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  • Levent Altinoglu

    (Federal Reserve Board of Governors)

Abstract

I show that inter-firm lending plays an important role in business cycle fluctuations. I first build a tractable network model of the economy in which trade in intermediate goods is financed by supplier credit. In the model, a financial shock to one firm affects its ability to make payments to its suppliers. The credit linkages between firms propagate financial shocks, amplifying their aggregate effects by about 30 percent. To calibrate the model, I construct a proxy of inter-industry credit flows from firm- and industry-level data. I then estimate aggregate and idiosyncratic shocks to industries in the US and find that financial shocks are a prominent driver of cyclical fluctuations, accounting for two-thirds of the drop in industrial production during the Great Recession. Furthermore, idiosyncratic financial shocks to a few key industries can explain a considerable portion of these effects. In contrast, productivity shocks had a negligible impact during the recession.

Suggested Citation

  • Levent Altinoglu, 2018. "The Origins of Aggregate Fluctuations in a Credit Network Economy," 2018 Meeting Papers 626, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:626
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    References listed on IDEAS

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    4. Shaowen Luo, 2020. "Propagation of Financial Shocks in an Input-Output Economy with Trade and Financial Linkages of Firms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 36, pages 246-269, April.
    5. Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Russo, Alberto & Stiglitz, Joseph E., 2010. "The financial accelerator in an evolving credit network," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1627-1650, September.
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    Cited by:

    1. Shaowen Luo, 2020. "Propagation of Financial Shocks in an Input-Output Economy with Trade and Financial Linkages of Firms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 36, pages 246-269, April.
    2. Yoshiyuki ARATA, 2020. "The Role of Granularity in the Variance and Tail Probability of Aggregate Output," Discussion papers 20027, Research Institute of Economy, Trade and Industry (RIETI).

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