From interaction to Business Fluctuations: How Credit Network Explain Cycles

Abstract: In this paper, we develop a macroeconomic model with heterogeneous interacting agents to study the effects of different configurations of the interbank network on the overall performance of the economy. Specifically, we implement a simple decentralized matching model in which deposit, credit and interbank relations evolve endogenously via a fitness measure. Our findings confirm the importance of the interbank market as an indisputable source of economic stability able to counterbalance deposit withdrawal and stabilize the credit allocation. However, when highly centralized, this market can amplify the effects of shocks in the economy due to coordination failures of core banks.