Banking networks and the circuit theory of money

We consider a network of interconnected banks coupled with a macroeconomic model. The key feature of the model is that money is created endogenously to satisfy the demand for loans and deposits of the other economic agents.... [ view full abstract ]

We consider a network of interconnected banks coupled with a macroeconomic model. The key feature of the model is that money is created endogenously to satisfy the demand for loans and deposits of the other economic agents. The macroeconomic model is driven by stochastic consumption and stock-flow consistence provide the total amount of external loans and deposits for the banking sector. We distribute these aggregate quantities among the banks using a preferential attachment mechanism and study the stability of the resulting network. Crucially, the amplification of shocks within the banking network can drive the model away from its stable equilibrium.