Financial and Production Integration in the Macroeconomy

Brancati, Emanuele; Cao, Qingqing; Minetti, Raoul; Yi, Nicholas Jaehyun

doi:10.26509/frbc-wp-202619

Working Paper

Financial and Production Integration in the Macroeconomy

Abstract: This paper studies how integration between the financial sector and production networks shapes business cycle transmission. We develop a dynamic model in which banks provide asset-based financing to firms embedded in supply chains. The model highlights two margins of bank–supply chain integration with opposite macroeconomic implications. Extensive-margin integration—captured by firms’ access to banks specializing in different supply chain segments—amplifies negative banking shocks. By contrast, intensive-margin integration—captured by the diffusion of factoring and invoice discounting—attenuates banking disruptions. The model reveals that the stabilizing effects of integration dominate when firm production linkages are tight. The predictions are consistent with matched bank–firm data from Italy.

JEL Classification: E23; E32; E44;

https://doi.org/10.26509/frbc-wp-202619