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 “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.