A new study published in the May 2026 issue of the American Economic Review offers fresh insight into how financial and production networks interact during periods of economic stress. Conducted by an international team of researchers, the study examines how supply chain relationships between firms combine with financial ties to banks to shape the spread of economic shocks throughout the wider economy.

The researchers developed a framework that brings together two critical features of modern economies: the network of production relationships linking firms to suppliers and customers, and the network of financial relationships connecting firms to banks. While these systems are often analysed separately, the study shows that understanding their interaction is essential for explaining how financial disturbances spread beyond the banking sector.

The findings suggest that the combined effects of production and financial networks significantly magnify the impact of banking shocks. Rather than remaining confined to directly affected firms, disruptions can spread across interconnected supply chains, intensifying economic instability. According to the researchers, failing to account for this interaction may lead to a substantial underestimation of systemic risk and the broader consequences of financial crises.

“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,” said Kenan Huremovic, one of the study’s authors. “Bank shocks ripple through the production network, travelling both downstream to customers and upstream to suppliers. We find that these network effects amplify the impact of bank shocks on GDP by nearly 50%.”

The study also found that disruptions affecting distant suppliers and customers can be just as important as shocks hitting firms’ immediate business partners. This highlights how deeply interconnected modern economies have become, with financial strain capable of travelling through multiple layers of production networks before ultimately affecting economic growth and stability.

The researchers argue that many traditional macroeconomic models may underestimate vulnerability during financial crises because they fail to capture the interaction between production and financial linkages. They suggest that policymakers should adopt more integrated approaches to financial regulation and economic stabilisation that take these interconnected networks into account. “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,” Huremovic said.

More information: Kenan Huremović et al, Production and Financial Networks in Interplay, American Economic Review. DOI: 10.1257/aer.20201088

Journal information: American Economic Review Provided by IMT School for Advanced Studies Lucca