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A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility a b c Domenico Delli Gatti, Corrado Di Guilmi, Edoardo Gaffeo, Gianfranco Giulioni,b Mauro Gallegati,b* Antonio Palestrini,b a Institute of Quantitative Methods and Economic Theory, Catholic University of Milan, Largo Gemelli1, I-20123 Milan, Italy b Department of Economics, Università Politecnica delle Marche, Piaz.le Martelli 8, I-60121 Ancona, Italy c Department of Economics and CEEL, University of Trento, Via Inama 5, I-33100 Trento, Italy September 6th, 2003 Abstract In this paper we discuss a scaling approach to business fluctuations. Our starting point consists in recognizing that concepts and methods derived from physics have allowed economists to (re)discover a set of stylized facts which have to be satisfactorily accounted for in their models. Standard macroeconomics, based on a reductionist approach centered on the representative agent, is definitely badly equipped for this task. On the contrary, we show that a simple financial fragility agent-based model, based on complex interactions of heterogeneous agents, is able to replicate a large number of scaling type stylized facts with a remarkable high degree of statistical precision. Keywords: Business fluctuations; power law distribution; agent-based model. JEL classification: E32, C63, C82. * Corresponding author. E-mail: gallegati@dea.unian.it (M. Gallegati). 1 1. Introduction Recent