Systemic Importance and Aggregate Fluctuations with Multiplex Interactions
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Abstract: A substantial literature has studied the propagation and amplification of microeconomic shocks within a monolayer network. However, transmission of shocks through interrelated multilayer networks is not yet understood. We propose a reduced form model of multidimensional economic interdependence, featuring complementary or substitutionary actions of agents active in multiple networks. The model extends the monolayer network concepts of systemic importance and micro-induced aggregate fluctuations to their multi-layered counterparts, where an idiosyncratic shock can cascade through both intra- and inter-network margins. We find that the centrality rankings of agents in a single network are no longer sufficient to identify key agents in a multilayer framework. Agents least central in one network may be systemically more important in the aggregate system due to their capacity to produce cascades across networks. A narrow focus on a single network may lead to an overestimation of individual systemic importance. We also show that microeconomic shocks can generate higher aggregate volatility in a multilayer network, especially when complementarity among networks with similar interconnection patterns transmit and amplify idiosyncratic disturbances. As a consequence, economies exhibiting multiplex connectivity are more prone to large downturns.
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