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on Network Economics |
| By: | Ethan Cohen-Cole (Econ One Research); Eleonora Patacchini (Cornell University and EIEF); Yves Zenou (Stockholm University and IFN) |
| Abstract: | This paper proposes a model of network interactions in the interbank market. Our innovation is to model systemic risk in the interbank network as the propagation of incentives or strategic behavior rather than the propagation of losses after default. Transmission in our model is not based on default. Instead, we explain bank profitability based on competition incentives and the outcome of a strategic game. As competitors’ lending decisions change, banks adjust their own decisions as a result: generating a ‘transmission’ of shocks through the system. We provide a unique equilibrium characterization of a static model, and embed this model into a full dynamic model of network formation. We also determine the key bank, which is the bank that is crucial for the stability of the financial network. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:eie:wpaper:1408&r=net |
| By: | Dong He (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research); Xiangrong Yu (Hong Kong Institute for Monetary Research) |
| Abstract: | The dominance of the US dollar in foreign exchange (FX) markets appears to reflect very strong network effects in the use of international currencies. What we observe today is the result of a slow-moving process that has witnessed a switch from the dominance of the pound sterling to the US dollar, perhaps during the interwar period in the early part of the 20th century. This paper presents a discrete choice model of FX trading that explicitly allows for this type of critical transitions in order to understand the dynamics of currency turnover in FX markets. We estimate the model using the Bank for International Settlements' data from triennial surveys of FX markets and also examine the factors that could potentially shift the dynamic path and lead to an earlier critical transition. We then discuss the implications for the renminbi, a budding international currency. If the renminbi were to become a dominant international currency, it would require China to attain a much higher level of financial development and openness. It is important to note that our model does not address the possibility of a gradual weakening of the network effects in FX markets due to, for example, the advancement of trading technologies, which would allow the co-existence of a few equally dominant major currencies. |
| Keywords: | Foreign Exchange, International Currency, Network Effects, Financial Development, Renminbi, Critical Transition |
| JEL: | F31 F33 G12 O53 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:242014&r=net |
| By: | Yanhao Wei (Department of Economics, University of Pennsylvania) |
| Abstract: | As demand increases, airline carriers often increase flight frequencies to meet the larger flow of passengers in their networks, which reduces passengers' schedule delays and attracts more demand. Motivated by this, I study a structural model of the U.S. airline industry accounting for possible network effects of demand compared with previous studies, the model implies higher cost estimates, which seem more consistent with the unprofitability of the industry; below-marginal-cost pricing becomes possible and appears on many routes. I also study airline mergers and find that the network effects can be the main factor underlying their profitability. |
| Keywords: | Airlines, Network Effects, Flight Frequency, Merger, Networks |
| JEL: | L13 L93 D62 C31 |
| Date: | 2014–09–21 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:14-027&r=net |
| By: | Neil Gandal (Tel Aviv University and CEPR); Hanna Halaburda (Bank of Canada, CESifo and INE PAN) |
| Abstract: | We analyze how network effects affect competition in the nascent cryptocurrency market. We do so by examining the changes over time in exchange rate data among cryptocurrencies. Specifically, we look at two aspects: (1) competition among different currencies, and (2) competition among exchanges where those currencies are traded. Our data suggest that the winner-take-all effect is dominant early in the market. During this period, when Bitcoin becomes more valuable against the U.S. dollar, it also becomes more valuable against other cryptocurrencies. This trend is reversed in the later period. The data in the later period are consistent with the use of cryptocurrencies as financial assets (popularized by Bitcoin), and not consistent with ``winner-take-all'' dynamics. |
| Keywords: | bitcoin, cryptocurrency, network effects |
| JEL: | L17 L86 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1417&r=net |