Financial fragility and distress propagation in a network of regions

Authored by Stefania Vitali, Mauro Gallegati, Stefano Battiston

Date Published: 2016

DOI: 10.1016/j.jedc.2015.10.003

Sponsors: Swiss National Fund

Platforms: No platforms listed

Model Documentation: Other Narrative Flow charts Mathematical description

Model Code URLs: Model code not found

Abstract

We investigate how the financial fragility in the real economy is affected by the average level of interdependence among agents across different regions of the economy. To this end, we develop a parsimonious agent-based model of firms and banks organized in geographic regions. The model is built on the framework of an existing class of models for business fluctuations. The goal of our exercise is to clarify the effect on systemic failures of the interplay between network interconnectedness and financial acceleration. In particular, we investigate the probability of individual and systemic failures with varying levels of interconnectedness. We find that, in the absence of financial acceleration, connectivity makes the system more resilient. In contrast, in the presence of financial acceleration, the probability of both individual and systemic failures are minimized at intermediate level of diversification. (C) 2015 Published by Elsevier B.V.

Tags

Evolution Risk Contagion Diversification Liberalization Cascades investment stability Interbank market Lending relationships