Free-form Thought of the Day...

Not quite Faulkner-esque stream of conciousness, but...

While walking the dog this morning, I began thinking about the evolution of economic networks over the business cycle.  I think there may be a way to take Hyman Minsky's financial instability hypothesis and embed it into a dynamic network context.  The idea would be to take a model that links business cycles in the real economy with network evolution in the financial sector.  Two possible features of network evolution over the business cycle that I think would map nicely into Minsky's instability hypothesis:

1. During the growth phase of the business cycle links are added to the financial network as more lending takes place, and
2. If one thinks of the links between any two financial institutions in the network as being weighted in proportion to the amount of credit/debt between the two firms, then if leverage levels increase with the business cycle these links will be "strengthened."

Do business cycles incentivize the development of certain network structures in financial markets that are locally robust, but globally fragile?  If so how does this robust, yet fragile network relate to Minsky's instability hypothesis?  Alternatively does the evolution of certain network structures in the financial markets drive business cycles?  Do incentive structures in the financial markets encourage the development of robust yet fragile networks that invariably breakdown causing recessions?  Maybe a little bit of both?  To be continued...