Stock Market Dynamics, Leveraged Network-Based Financial Accelerator and Monetary Policy

Luca Riccetti, Alberto Russo and Mauro Gallegati

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper we build an agent-based model based on a threefold financial accelerator: (i) leverage accelerator - negative shocks on firms' output make banks less willing to loan funds, and firms less willing to make investments, hence a credit reduction follows further reducing the output; (ii) stock market accelerator - due to lower profit, firms' capitalization on the stock market decreases, thus the distance-to-default (DD) diminishes and it reinforces the leverage accelerator; (iii) network-based accelerator - the network structure may propagate the initial shock possibly resulting in an avalanche of bankruptcies. In this framework, we find that stock market volatility may damage the real economy if the stock market is too relevant. In particular, an increase of volatility worsens the economic performance through the stock market accelerator effect. Moreover, our findings have relevant implications for monetary policy.

Keywords: Agent-based modeling; stock market; leverage; network; volatility; fnancial accelerator; monetary policy. (search for similar items in EconPapers)
JEL-codes: C52 C63 E32 G01 (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-cmp, nep-hme and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Stock market dynamics, leveraged network-based financial accelerator and monetary policy (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:63622

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