Leverage, Liquidity and Crisis: A Simulation Study
19 Pages Posted: 16 Dec 2011
Date Written: 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.
Keywords: leverage, capital investment, capacity utilization, simulation modeling
JEL Classification: E22, E32, E37
Suggested Citation: Suggested Citation