The Financial Network Channel of Monetary Policy Transmission: An Agent-Based Model

The purpose of this paper is to contribute to a further understanding of the impact of monetary policy shocks on a financial network, which we dub the “financial network channel of monetary policy transmission†. To this aim, we develop an agent-based model (ABM) in which banks extend loans to firms. The bank-firm credit network is endogenously time-varying as determined by plausible behavioral assumptions, with both firms and banks being always willing to close a credit deal with the network partner perceived to be less risky. We then assess through simulations how exogenous shocks to the policy interest rate affect some key topological measures of the bank-firm credit network (density, assortativity, size of largest component, and degree distribution). Our simulations show that such topological features of the bank-firm credit network are significantly affected by shocks to the policy interest rate, and this impact varies quantitatively and qualitatively with the sign, magnitude, and duration of the shocks.