Markets connectivity and financial contagion

In this paper we investigate the sources of instability in credit and financial systems and the effect of credit linkages on the macroeconomic activity. By developing an agent-based model, we analyze the evolving dynamics of the economy as a complex, adaptive and interactive system, which allows us to explain some key events that occurred during the recent economic and financial crisis. In particular, we study the repercussions of inter-bank connectivity on banks’ performances, bankruptcy waves and business cycle fluctuations. Interbank linkages, in fact, not only allow participants to share risk but also create potential for one bank’s crisis to spread through the network. The purpose of the model is, therefore, to build up the dependence among agents at the micro-level and to estimate their impact on the macro stability.