Leverage, Liquidity and Crisis: A Simulation Study

19 Pages Posted: 16 Dec 2011

See all articles by Antoine Godin

Antoine Godin

Centre d'économie de l'Université de Paris Nord (CEPN); Agence Française de Développement (AFD); Hans-Boeckler-Stiftung - Macroeconomic Policy Institute (IMK)

Stephen Kinsella

University of Limerick

Date Written: 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.

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

JEL Classification: E22, E32, E37

Suggested Citation

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

Antoine Godin

Centre d'économie de l'Université de Paris Nord (CEPN) ( email )

UMR7115
Université Paris-Nord
Paris XIII
France

Agence Française de Développement (AFD) ( email )

5, rue Roland Barthes
Paris Cedex 12, 75598
France

Hans-Boeckler-Stiftung - Macroeconomic Policy Institute (IMK) ( email )

Hans-Böckler-Straße 39
40476 Düsseldorf
Germany

Stephen Kinsella (Contact Author)

University of Limerick ( email )

Limerick
Ireland
+35361233611 (Phone)
+35361330316 (Fax)

HOME PAGE: http://stephenkinsella.net

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