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Leveraged Network-Based Financial Accelerator

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 “pecking 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) policy maker has to develop the laws about bankruptcies to reduce the LGDR and improve the stability of banks.

Quaderno di Ricerca n°371 del Dipartimento di Scienze Economiche e Sociali dell’Università Politecnica delle Marche
Date of publication: 
Riccetti L.
Russo A.
Gallegati M.