The Systemic Impact of Debt Default in a Multilayered Global Network Model
TheSystemicImpactofDebtDefaultinaMultilayeredGlobalNetworkModel NathanPorter,CamiloE.Tovar,JuanP.Treviño,JohannesEugster,andTheofanisPapamichalis WP/22/171 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2022 SEP ©2022InternationalMonetaryFundWP/22/171 IMFWorkingPaper Strategy,Policy,andReviewDepartment Thesystemicimpactofdebtdefaultinamultilayeredglobalnetworkmodel PreparedbyNathanPorter,CamiloE.Tovar,JuanP.Treviño,JohannesEugster,andTheofanisPapamichalis* AuthorizedfordistributionbyDeliaVelculescuSeptember2022 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Theworldhasbecomemoreinterconnectedoverthepastfewdecades.Againstthisbackdrop,economicandfinancialcontagionfollowingadverseshockscanhaveasevereimpactontheglobaleconomy.Howsystemiccantheeffectsofcontagionbe?Whatspecifictransmissionchannelsareinvolved?Whatistheirrelativeimportance?Weaddressthesequestionsusingamultilayeredglobalnetworkmodelofcontagionthatsimulatestheimpactofsovereigndebtdefaultontheglobaleconomy.Wealsodevelopameasureofglobalsystemicriskandusebankstresstestingtechniquestoquantifythesystemicimpactoftheshockandtheextentofcontagionontheglobaleconomy.Ourmodelshowsthateconomicandfinancialcontagionarehighlynon-linear,andmanybystandereconomiescanexperiencesignificantnegativeeffectsastheinitialdefaultisspreadthroughthenetwork.Thissuggeststhatmanyeconomiesmightbesystemicallymoreimportantthanwhatconventionalmeasuresofsizeoropennessmightsuggest. JELClassificationNumbers: C40,C45,F30,F41,F65,G01,G15 Keywords Network;Contagion;Crises;Stress-test Author’sE-MailAddress: nporter@imf.org;ctovar@imf.org(correspondingauthor);jtrevino@imf.org. *WethankAnaCorbachoandDeliaVelculescufortheirguidance,support,andencouragementtopursuethisproject.WealsoacknowledgeveryusefuldiscussionswithDraganaOstojic,TianxiaoZheng,YiqunWu,commentsfromCeylaPazarbasioglu,MartinMühleisen,KristinaKostial,JerominZettlemeyer,ShekharAiyar,andJoeKogan,andoutstandingresearchassistanceofEthanBoswellandYuchenZhang.ThispaperwaspreparedwhileJohannesEugsterwasIMFstaffandTheofanisPapamichaliswasasummerinternattheIMF. WORKINGPAPERS TheSystemicImpactofDebtDefaultinaMultilayeredGlobalNetworkModel PreparedbyNathanPorter,CamiloE.Tovar,JuanP.Treviño,JohannesEugster,andTheofanisPapamichalis Contents I.Introduction3 II.Trade,Financial,andRealNetworks5 III.ANetworkModelofContagion8 A.Multi-layeredNetwork8 IV.Data9 A.MeasuringInterconnectednessandAssessingContagion9 V.Stress-TestingtheGlobalEconomy12 VI.ConclusionsandPossibleExtensions16 References20 FIGURES 1.SelectedDebtIndicators4 2.TheMultilayeredNetworkModel10 3.NumberofSubsequentEconomiesFallingintoDebtDefault12 4.InterconnectednessandDefault—SelectedCentralityMeasuresandEconomies13 5.GlobalVulnerabilityIndex14 6.InterconnectednessandGlobalVulnerability—SelectedCentralityMeasuresandGlobalVulnerabilityIndex ............................................................................................................................................................................15 TABLES 1.GlobalNetworkCentralityMeasures(Average,2018)11 APPENDIXES TableI.ListofEconomies17 TableII.Economy-SpecificCentralityMeasures18 I.Introduction Theworldeconomyhasbecomehighlyinterconnected,largelyreflectingtherapidexpansionofcross-bordertradeandfinancialoperations.Overthepast40yearsglobaltradehasincreasedabouttenfold,whileinternationalfinancialflowshaveincreasedabout45times.1Theincreasedinterconnectednesshasdeliveredsubstantialbenefits.Ithashelpedimproveefficiencyinproduction––asreflectedbytheintegrationandprevalenceofglobalvaluechains(GVCs)––andsupportedtheexpansionofresearchandinvestmentactivitiesacrosseconomies.Ithasalsopromptedthebroadavailabilityofgoodsandservicesnearlyeverywhereandallowedindividualsandfirmstodiversifyrisks.Indoingso,ithashelpedspurinnovationandgrowththroughouttheglobe. However,interconnectednesscomeswithtrade-offs.Itsbenefitsintermsofdiversificationandgrowthhavecomealongwithgreatervulnerabilities.Economiesandeconomicagentshavebecomemoreexposedtoeachother,thusincreasingtheriskofcontagionwhenidiosyncraticshockshittheglobaleconomy.Thesevulnerabilitiesstemfromthesamediversificationchannelsthroughwhichbenefitsspreadacrosstheglobe.Forexample,itiswidelyacknowledgedthatthecollapseofLehmanBrothersin2008triggereddistressacrosstheglobalfinancialsystem,withsignificantadverseeffectsontherealeconomy,resultinginwhatisnowknownastheglobalfinancialcrisis.Subsequentepisodesofturmoil,includingtheso-calledtapertantrumin2013,alsotriggeredchainsreactionsinfinancialmarketsacrosstheglobe(Sahayetal.,2014).Morerecently,theCOVID-19crisisanditsglobaleconomicandfinancialimp
