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

- An agent-based model (ABM) with a financial accelerator is proposed.
- The financial accelerator is threefold based on leverage, stock market, and network.
- The stock market influences firms distance to default and then the economy.
- We find that a large stock market volatility can harm the economy.
- Monetary policy should also consider potential stock market bubbles effect.

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.