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Financial fragility and distress propagation in a network of regions

Listed author(s):
  • Stefania Vitali

    ()

  • Stefano Battiston
  • Mauro Gallegati

Building on previous works on business fluctuations, we model the propagation of financial distress in a network of regions, each populated by heterogeneous interacting firms and banks. In order to diversify risk, firm sell goods outside their own region and borrow from banks located there. However, this results in ties across regions which propagate financial distress across regional borders. We investigate how the average level of economic integration affects the probability of both individual and systemic failures. We find that the benefit of greater diversification is eventually offset by the effect of financial acceleration and contagion. In particular, beyond a certain level of integration the economy suffers more frequently from events with larger numbers of simultaneous failures.

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Paper provided by ETH Zurich, Chair of Systems Design in its series Working Papers with number ETH-RC-12-016.

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Handle: RePEc:stz:wpaper:eth-rc-12-016
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