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Leveraged Network-Based Financial Accelerator

  • Luca RICCETTI

    ()

    (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali)

  • Alberto RUSSO

    ()

    (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali)

  • Mauro GALLEGATI

    ()

    (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali)

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.

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Paper provided by Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali in its series Working Papers with number 371.

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Length: 31
Date of creation: Dec 2011
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Handle: RePEc:anc:wpaper:371
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