A Simple Model of Business Fluctuations with Heterogeneous Interacting Agents and Credit Networks

we describe, implement and simulate a very simple model, that is a simplified version of Riccetti et al. (2013), by using R. In the original paper, a multitude of heterogeneous firms and banks interact in the credit market. Firms want to produce and sell a homogeneous commodity in the goods market and, in order to finance production, they need credit from banks. Firms look at a random subset of potential partners (due to imperfect information) and then choose the most convenient bank (i.e. the bank charging the lowest interest rate); as a consequence, an endogenous network of credit interlinkages evolves over time. The model shows the emergence of business fluctuations and highlights both the role of financial fragility and network structure in shaping economic dynamics.