Do economic shocks spread randomly?: A topological study of the global contagion network.

Abstract

The spread of economic shocks in an increasingly interconnected global economy has been subject to several studies recently. These studies mostly focus on the synchronization of business cycles among economies and search for the relationship between trade linkages and shock contagion. In contrast to previous studies in the field, this paper focuses on the topological properties of the shock contagion network as measured by pairwise Granger causality between economic output of countries. This topological approach can bring new insights into the dynamics of contagion and the relationship between trade and cycle synchronization while also allows to test the patterns of shock contagion against randomness. Results show that connectedness decreases over the previous decades until the first decade of the 21st century, showing less frequent shock transmission which shades previous results in the field which typically associate increasing trade and globalization with more frequent or unchanged contagion. We find significant non-random topology with respect to transitivity and path lengths, the skewness of the degree distribution and the stability of connections. Estimations show that there is a systematically existing (persistent) contagion path in 16% of all possible connections. However, we do not find significant geographical or development-wise patterns behind the modularity of the contagion network and no significant association is found between economic openness and exposure to shock transmission in either direction.