Leveraged network-based financial accelerator

Luca Riccetti, Alberto Russo and Mauro Gallegati

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 8, 1626-1640

Abstract: In this paper we build on the network-based financial accelerator model of Delli Gatti et al. (2010), modelling the firms' financial structure following the “dynamic trade-off theory”, instead of the “packing order theory”. Moreover, we allow for multiperiodal debt structure and consider multiple bank-firm links based on a myopic preferred-partner choice. In case of default, we also consider the loss given default rate (LGDR). We find many results: (i) if leverage increases, the economy is riskier; (ii) a higher leverage pro-cyclicality has a destabilizing effect; (iii) a pro-cyclical leverage weakens the monetary policy effect; (iv) a central bank that wants to increase the interest rate should previously check if the banking system is well capitalized; (v) an increase of the reserve coefficient has an impact similar to that produced by raising the policy rate, but for the enlargement of bank reserves that improves the resilience of the banking system to shocks.

Keywords: Leverage; Dynamic trade-off theory; Network; Bankruptcy cascades; Monetary policy; Macroprudential regulation (search for similar items in EconPapers)
JEL-codes: C63 E32 E52 G01 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (102)

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Working Paper: Leveraged Network-Based Financial Accelerator (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:8:p:1626-1640

DOI: 10.1016/j.jedc.2013.02.008

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