Financial fragility and distress propagation in a network of regions

Stefania Vitali, Stefano Battiston and Mauro Gallegati

Journal of Economic Dynamics and Control, 2016, vol. 62, issue C, 56-75

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.

Keywords: Financial networks; Financial fragility; Financial contagion; Business fluctuations; Financial acceleration (search for similar items in EconPapers)
JEL-codes: E32 F4 G01 L14 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:62:y:2016:i:c:p:56-75

DOI: 10.1016/j.jedc.2015.10.003

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