Evolution of the Global Financial Network and Contagion: A New Approach
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund
  • 2 https://isni.org/isni/0000000404811396, International Monetary Fund
  • 3 https://isni.org/isni/0000000404811396, International Monetary Fund
  • 4 https://isni.org/isni/0000000404811396, International Monetary Fund
This paper studies the interconnectedness of the global financial system and its susceptibility to shocks. A novel multilayer network framework is applied to link debt and equity exposures across countries. Use of this approach—that examines simultaneously multiple channels of transmission and their important higher order effects—shows that ignoring the heterogeneity of financial exposures, and simply aggregating all claims, as often done in other studies, can underestimate the extent and effects of financial contagion.The structure of the global financial network has changed since the global financial crisis, impacted by European bank’s deleveraging and higher corporate debt issuance. Still, we find that the structure of the system and contagion remain similar in that network is highly susceptible to shocks from central countries and those with large financial systems (e.g., the USA and the UK). While, individual European countries (excluding the UK) have relatively low impact on shock propagation, the network is highly susceptible to the shocks from the entire euro area. Another important development is the rising role of the Asian countries and the noticeable increase in network susceptibility to shocks from China and Hong Kong SAR economies.
IMF Working Papers

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