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Interbank Network Disruptions and The Real Economy

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  • Dasha Safonova

    (University of Notre Dame)

Abstract

Shocks to the structure of the interbank lending network can have important macroeconomic repercussions. This paper examines the impact of the dynamic structure of the interbank lending network on interest rates and investment in the nonfinancial sector. By incorporating a network of bank relationships into a general equilibrium model with monetary policy, I show that the aggregate interest rate increases in response to a shock that destroys a large fraction of bank relationships and decreases in response to a shock that destroys a small fraction of relationships. Moreover, the shape of the interbank network matters for these dynamics: the interest rate is least responsive to the network disruptions if the interbank network is scale-free. Additionally, the amplification and propagation of the network shocks depend on the corridor of the policy rates set by the central bank. In particular, as the difference between the discount rate and the excess reserve rate decreases, the effect of a network disruption on interest rates becomes less significant but more persistent, which in turn leads to a smaller but more prolonged effect on the real sector.

Suggested Citation

  • Dasha Safonova, 2017. "Interbank Network Disruptions and The Real Economy," 2017 Meeting Papers 1568, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:1568
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    References listed on IDEAS

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    Cited by:

    1. Brunetti, Celso & Harris, Jeffrey H. & Mankad, Shawn, 2023. "Networks, interconnectedness, and interbank information asymmetry," Journal of Financial Stability, Elsevier, vol. 67(C).
    2. Celso Brunetti & Jeffrey H. Harris & Shawn Mankad, 2021. "Liquidity Networks, Interconnectedness, and Interbank Information Asymmetry," Finance and Economics Discussion Series 2021-017, Board of Governors of the Federal Reserve System (U.S.).

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