Inflation and systemic risk: A network econometric model

Abstract

This paper builds a network econometric model capable of analysing the impact of inflation on systemic risk. Its main contribution is the identification of a robust inverse relationship which reverses when controlling monetary policy. This reveals that the former effect is due to monetary policy reactions to inflation. It is further analysed whether this effect comes from overindebtness as in a Minsky moment. There is no evidence supporting it, which suggests that mechanisms other than excess credit underlie such a relationship. The results presented in this paper are of particular importance for understanding monetary policy reactions to current inflationary cycles.