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  • What a network measure can tell us about financial interconnectedness and output volatility

    Author(s)
    Xu, Ying
    Corbett, Jenny
    Griffith University Author(s)
    Corbett, Jenny
    Year published
    2020
    Metadata
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    Abstract
    This paper applies the PageRank algorithm, often used in network analysis, to capture multidimensional and high-degree, cross-border banking relations among countries. It provides a nuanced picture of financial interconnectedness that has not been available in the literature to date.Our measure, FIRank, shows the probability of connection to the network by any country or, equivalently, the share of all connections captured by each country, and provides relative rankings of countries according to their degree of interconnectedness. We show that the United Kingdom and the United States remain the ‘core’ in the global banking ...
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    This paper applies the PageRank algorithm, often used in network analysis, to capture multidimensional and high-degree, cross-border banking relations among countries. It provides a nuanced picture of financial interconnectedness that has not been available in the literature to date.Our measure, FIRank, shows the probability of connection to the network by any country or, equivalently, the share of all connections captured by each country, and provides relative rankings of countries according to their degree of interconnectedness. We show that the United Kingdom and the United States remain the ‘core’ in the global banking network over a thirty-three-year period, with most countries scattered in the ‘periphery’ despite considerable growth and change in the network.This finding contrasts with claims of an increasingly even distribution of connections reported in other studies using more limited network measures. Examining whether financial interconnectedness raises or lowers output volatility, we show that the relationship is nonlinear: initially, higher interconnectedness raises volatility, but beyond a critical level volatility is reduced. This is true in periods of smaller and idiosyncratic shocks but is even more pronounced in the GFC period of large shocks. The novelty of our approach lies in applying well-understood network measures to cross-border banking data to identify where countries rank in international financial interconnectedness with the global bank-lending network.Further, by explicitly analysing how the relative interconnectedness index is related to output volatility we provide new insights into the pros and cons of higher levels of international financial interconnection.
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    Journal Title
    Journal of the Japanese and International Economies
    Volume
    58
    DOI
    https://doi.org/10.1016/j.jjie.2020.101105
    Subject
    Economic Theory
    Applied Economics
    Social Sciences
    International Relations
    Business & Economics
    Financial integration
    Publication URI
    http://hdl.handle.net/10072/400636
    Collection
    • Journal articles

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