Leverage, Liquidity and Crisis: A Simulation Study
University of Pavia
University of Limerick
December 16, 2011
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, E37working papers series
Date posted: December 16, 2011
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