Working Paper: NBER ID: w20931
Authors: Daron Acemoglu; Asuman Ozdaglar; Alireza Tahbazsalehi
Abstract: This chapter develops a unified framework for the study of how network interactions can function as a mechanism for propagation and amplification of microeconomic shocks. The framework nests various classes of games over networks, models of macroeconomic risk originating from microeconomic shocks, and models of financial interactions. Under the assumption that shocks are small, we provide a fairly complete characterization of the structure of equilibrium, clarifying the role of network interactions in translating microeconomic shocks into macroeconomic outcomes. This characterization enables us to rank different networks in terms of their aggregate performance. It also sheds light on several seemingly contradictory results in the prior literature on the role of network linkages in fostering systemic risk.
Keywords: network interactions; systemic risk; microeconomic shocks; macroeconomic outcomes
JEL Codes: D85; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| interaction function properties (C67) | macroeconomic outcomes (E66) |
| microeconomic shocks (E39) | macroeconomic outcomes (E66) |
| dense networks (C45) | economic performance (when interaction function is concave) (D22) |
| sparser networks (C45) | economic performance (when interaction function is concave) (D22) |
| dense networks (C45) | instability (when interaction function is convex) (C62) |
| concentration centrality (D30) | systemic importance (E44) |