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The leveraged network-based financial accelerator and the real economy: an empirical investigation for Luxembourg
18-05-2020 | STATEC

The financial sector, representing 26% of GDP, is an important part of the Luxembourgish economy. Therefore, the question of whether and how the financial sector and the real economy are interrelated is particularly important, especially in times of crisis. This paper assesses the role of the financial sector in the amplification and propagation of shocks.

Building on previous work published by STATEC (Économie et statistiques N° 101/2018), the model developed in this paper allows for self-reinforcing co-movements between investment in machinery and equipment, credit, spreads and a banking solvency index. The results show that this so called "financial accelerator mechanism" can contribute to magnify the shocks on the Luxembourgish economy.