A new study published in the May 2026 issue of the American Economic Review and authored by an international group of researchers gives a different perspective on how production and financial networks are at interplay. The research develops a framework that integrates two key dimensions of modern economies: the network of supply relationships among firms and the web of financial connections linking firms to banks. While these networks have traditionally been studied in isolation, the paper demonstrates that their interplay is essential to understanding how bank shocks affect the real economy.
The findings reveal that the interaction between financial and production networks amplifies the effects of bank shocks by substantial margin. In these cases, shocks do not simply add up: failing to account for this factor can lead to a significant underestimation of systemic risk and true reach of economic disturbances.
"We show that when borrowing from banks becomes more difficult and expensive during a financial crisis, the impact does not stop at the directly affected firms — it propagates through supply chains. Bank shocks ripple through the production network, traveling both downstream (to customers) and upstream (to suppliers)," explains Kenan Huremovic, researcher in economics at the IMT School for Advanced Studies Lucca, and one of the authors of the paper. "We find that these network effects amplify the impact of bank shocks on GDP by nearly 50%. Importantly, shocks to firms' distant suppliers and customers contribute as much to this aggregate effect as those affecting their direct customers and suppliers".
Importantly, the results suggest that traditional macroeconomic models may underestimate systemic vulnerability if they overlook the interplay between production and financial linkages. Incorporating both dimensions leads to a better understanding of how firm specific financial shocks can escalate into economy-wide crises. From a policy perspective, the research points to the need for more integrated approaches to financial regulation and economic stabilization to prevent and respond to financial crises.
"These findings highlight that, to fully understand financial crises, it is crucial to account for such propagation mechanisms. Ignoring these linkages leads to an underestimation of the true economic impact of financial shocks and may result in insufficient policy responses. In short, understanding economic crises, and designing effective policies to prevent and respond to them, requires thinking in terms of interconnected networks rather than isolated firms and banks".
