Stock market dynamics, leveraged network-based financial accelerator and monetary policy

Luca Riccetti, Alberto Russo and Mauro Gallegati

International Review of Economics & Finance, 2016, vol. 43, issue C, 509-524

Abstract: We build an agent-based model with a threefold financial accelerator: (i) leverage—negative shocks on firms' output make banks less willing to loan funds and firms less willing to invest, and hence a credit reduction follows further reducing the output; (ii) stock market—due to lower profit, firms' capitalization on the stock market decreases, thus the distance-to-default diminishes and it reinforces the leverage accelerator; (iii) network—credit network may propagate the initial shock. We find that stock market volatility may damage the real economy if the stock market is too relevant. Our findings have relevant implications for monetary policy.

Keywords: Agent-based modeling; Stock market; Leverage; Financial accelerator; Monetary policy (search for similar items in EconPapers)
JEL-codes: C63 E32 E52 G01 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (14)

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Working Paper: Stock Market Dynamics, Leveraged Network-Based Financial Accelerator and Monetary Policy (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:43:y:2016:i:c:p:509-524

DOI: 10.1016/j.iref.2016.01.012

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