The financial network channel of monetary policy transmission: an agent-based model

The purpose of this paper is to explore the impact of monetary policy shocks on a financial network, which we dub the "financial network channel of monetary policy transmission". To this aim, we develop a agent-based model (ABM) in which banks extend loans to firms. The resulting bank-firm credit network is structured as determined by plausible behavioral assumptions, with both firms and banks being always willing to close a credit deal with the network partner perceived to be less risky. As our ABM succeeds in reproducing several key stylized facts of bank-firm credit networks, we then assess through simulations how exogenous shocks to the policy interest rate affect some key topological measures of the bank-firm credit network (density, assortativity, size of largest component, and degree distribution). Our simulations show that such topological features of the bank-firm credit network are significantly affected by shocks to the policy interest rate, with such an impact varying quantitatively and qualitatively with the sign, magnitude, and duration of the shocks.