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Leverage, Liquidity and Crisis: A Simulation Study


Antoine Godin


University of Pavia

Stephen Kinsella


University of Limerick
December 16, 2011


Abstract:     
We study the interactions of banks and firms within a leverage cycle to understand how capacity utilization and capital investment interact with funding costs, leverage by banks and firms, and liquidity. We show in a simulation study that when firms can grow and die by becoming insolvent, and when banks can grow and die as their bad debts increase to unsustainable levels, the real economy cycles around a leverage cycle.

Number of Pages in PDF File: 19

Keywords: leverage, capital investment, capacity utilization, simulation modeling

JEL Classification: E22, E32, E37

working papers series


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Date posted: December 16, 2011  

Suggested Citation

Godin, Antoine and Kinsella, Stephen , Leverage, Liquidity and Crisis: A Simulation Study (December 16, 2011). Available at SSRN: http://ssrn.com/abstract=1973500 or http://dx.doi.org/10.2139/ssrn.1973500

Contact Information

Antoine Godin
University of Pavia ( email )
Corso Strada Nuova, 65
27100 Pavia, 27100
Italy
HOME PAGE: http://www.antoinegodin.eu
Stephen Kinsella (Contact Author)
University of Limerick ( email )
Limerick
Ireland
+35361233611 (Phone)
+35361330316 (Fax)
HOME PAGE: http://stephenkinsella.net
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