Systemic risk and macro-financial interconnectedness using an FSAM framework

Abstract

We provide a general framework to assess the traceability of systemic risk and macro interconnectedness to understand the financial risk transmissions channels. Our contribution help address the information need established in the DGI-2 in a FSAM-based model that fully captures the interconnectedness between real and financial sectors. Recent developments in the field of IO and SAM evaluations have led to a renewed interest in the usage of linkage analysis to measure the role that a sector play within the economy. Focusing on the backward and forward linkage, hypothetical extraction method, and structural path analysis, we show how feasible it is to include heterogeneous financial institutions to study risk interactions effects on macroeconomic outcomes. This paper’s proposal may be useful for thinking about how micro-data and macro-aggregates can be incorporated into the set of financial soundness indicators, allowing to obtain an idea of the vulnerabilities of the financial sector.