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Leverage and Financial Instability

Author

Listed:
  • A. Smirnov.

Abstract

In the paper some prominent features of a modern financial system are studied using the model of leverage dynamics. Asset securitization is considered as a major factor increasing aggregate debt and hence system’s uncertainty and instability. A simple macrofinancial model includes a logistic equation of leverage dynamics that reveals origins of a financial bubble, thus corresponding closely to the Minsky "financial instability hypothesis". Using ROA, ROE, and the interest rate as parameters, the model provides wide spectrum of leverage and default probability trajectories for the short and long run.

Suggested Citation

  • A. Smirnov., 2012. "Leverage and Financial Instability," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 9.
  • Handle: RePEc:nos:voprec:2012-09-2
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    More about this item

    Keywords

    securitization; leverage; probability of default; financial bubble; financial instability.;

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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