The systemic impact of default in a multi-layered global network model

The systemic impact of default in a multi-layered global network model


Nathan Porter; Camilo E Tovar Mora; Juan P. Trevino; Johannes Eugster; Theofanis Papamichalis

Publication date:

September 2, 2022

Electronic access:

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Disclaimer: IMF Working Papers describe ongoing research by the author(s) and are published to elicit comment and encourage debate. The opinions expressed in IMF Working Papers are those of the authors and do not necessarily represent the views of the IMF, its Board of Directors, or IMF management.


The world has become more interconnected in recent decades. In this context, economic and financial contagion following adverse shocks can have serious repercussions on the global economy. How systemic can the effects of contagion be? What are the specific transmission channels involved? What is their relative importance? We address these questions using a multi-layered global contagion network model that simulates the impact of sovereign debt default on the global economy. We also develop a measure of global systemic risk and use bank stress testing techniques to quantify the systemic impact of the shock and the extent of contagion on the global economy. Our model shows that economic and financial contagion is highly nonlinear and that many bystander economies can experience significant negative effects as the initial default propagates through the network. This suggests that many economies may be systemically more important than conventional measures of size or openness might suggest.

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