Financially Constrained Fluctuations in an Evolving Network Economy

34 Pages Posted: 22 Jun 2008 Last revised: 25 Jul 2010

See all articles by Domenico Delli Gatti

Domenico Delli Gatti

Universita' Cattolica, Milano

Mauro Gallegati

Università Politecnica delle Marche - Faculty of Economics

Bruce C. N. Greenwald

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Alberto Russo

Università Politecnica delle Marche, Ancona - Department of Management

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: June 2008

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.

Suggested Citation

Delli Gatti, Domenico and Gallegati, Mauro and Greenwald, Bruce and Russo, Alberto and Stiglitz, Joseph E., Financially Constrained Fluctuations in an Evolving Network Economy (June 2008). NBER Working Paper No. w14112. Available at SSRN: https://ssrn.com/abstract=1149358

Domenico Delli Gatti

Universita' Cattolica, Milano ( email )

20123 Milano
Italy
+39 02 72342499 (Phone)
+39 02 72342923 (Fax)

Mauro Gallegati

Università Politecnica delle Marche - Faculty of Economics ( email )

Piazzale Martelli, 8
60121 Ancona
Italy
++390712207188 (Phone)
++390712207102 (Fax)

Bruce Greenwald (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
405b Uris, Dept. of Finance & Economics
New York, NY 10027
United States
(212) 854-5553 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alberto Russo

Università Politecnica delle Marche, Ancona - Department of Management ( email )

Piazzale Martelli, 8
60121 Ancona
Italy

Joseph E. Stiglitz

Columbia Business School - Finance and Economics ( email )

3022 Broadway
814 Uris Hall
New York, NY 10027
United States
(212) 854-0671 (Phone)
(212) 662-8474 (Fax)

HOME PAGE: http://www.josephstiglitz.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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