Working Paper: NBER ID: w14112
Authors: Domenico Delli Gatti; Mauro Gallegati; Bruce C. Greenwald; Alberto Russo; Joseph E. Stiglitz
Abstract: 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.
Keywords: No keywords provided
JEL Codes: E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| net worth of downstream (d) firms (L10) | production of upstream (u) firms (L19) |
| bankruptcy of a d firm (G33) | bankruptcy of its supplier (u firm) (G33) |
| bankruptcy of a d firm (G33) | bankruptcy of the bank (G33) |
| net worth of downstream (d) firms (L10) | systemic risk (E44) |