Systemic risk and macroeconomic fat tailsTools Bougheas, Spiros, Harvey, David and Kirman, Alan (2018) Systemic risk and macroeconomic fat tails. In: The economy as a complex spatial system. Springer proceedings in complexity . Springer, Cham, pp. 119-136. ISBN 978-3-319-65627-4
AbstractWe propose a mechanism for shock amplification that potentially can account for fat tails in the distribution of the growth rate of national output. We argue that extreme macroeconomic events, such as the Great Depression and the Great Recession, were preceded by significant turmoil in the banking system. We have developed a model of bank network formation and presented numerical simulations that show that, for the benchmark case, aggregate credit follows a random walk. When we introduce fire sales the model does not only produce larger variations in the growth of aggregate credit but also shows that there is an asymmetry between booms and busts that is also consistent with empirical evidence.
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