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

Posted: 6 Apr 2015

See all articles by Luca Riccetti

Luca Riccetti

Università degli Studi di Macerata

Alberto Russo

Università Politecnica delle Marche, Ancona - Department of Management

Mauro Gallegati

Università Politecnica delle Marche - Faculty of Economics

Date Written: April 4, 2015

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, financial accelerator, monetary policy

JEL Classification: C63, E32, E52, G01

Suggested Citation

Riccetti, Luca and Russo, Alberto and Gallegati, Mauro, Stock Market Dynamics, Leveraged Network-Based Financial Accelerator and Monetary Policy (April 4, 2015). Available at SSRN: https://ssrn.com/abstract=2589855 or http://dx.doi.org/10.2139/ssrn.2589855

Luca Riccetti (Contact Author)

Università degli Studi di Macerata ( email )

via Crescimbeni
Macerata
Italy

HOME PAGE: http://docenti.unimc.it/luca.riccetti

Alberto Russo

Università Politecnica delle Marche, Ancona - Department of Management ( email )

Piazzale Martelli, 8
60121 Ancona
Italy

Mauro Gallegati

Università Politecnica delle Marche - Faculty of Economics ( email )

Piazzale Martelli, 8
60121 Ancona
Italy
++390712207188 (Phone)
++390712207102 (Fax)

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