Financial and Production Integration in the Macroeconomy

Emanuele Brancati, Qingqing Cao, Raoul Minetti and Nicholas Jaehyun Yi

No 278, Working Papers in Public Economics from Department of Economics and Law, Sapienza University of Rome

Abstract: We study how the integration between the financial sector and the production structure influences business cycle transmission. In a dynamic economy where banks provide assetbased finance to supply chains, we find that integration along an extensive margin, in the form of firms’ ability to borrow from banks specialized in different supply chain segments, amplifies negative banking shocks. In contrast, integration along an intensive margin, in the form of greater diffusion of bank factoring and invoice discounting, mitigates the transmission of banking shocks. A quantitative application to Italy reveals that the destabilizing effects of bank-supply chain integration can prevail when inter-firm commercial linkages are underdeveloped. The predictions are consistent with bank-firm matched data from Italy.

Keywords: Banks; Financial integration; Production networks; Factoring (search for similar items in EconPapers)
JEL-codes: E23 E32 E44 (search for similar items in EconPapers)
Pages: 72
Date: 2026-03
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