The Origins of Aggregate Fluctuations in a Credit Network Economy
Engin L. Altinoglu
No 2018-031, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US)
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.
Keywords: Business cycles; Credit network; Financial frictions; Great recession; Input-output network; Trade credit (search for similar items in EconPapers)
JEL-codes: C32 C67 E23 E32 G10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge, nep-mac and nep-net
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