Content Inside :
Outline
* Paper writes down a stylized model to help think about these questions
* My discussion
* Explain the mechanics that drive the model
o Externality/ policy application
o Non-monotonic effect of maximum loan to value/ leverage ratio (? ) on probability of crises
* How does the model shed light on the effect of innovations, such as credit derivatives
Liquidity at date 1
* In order to avoid liquidation at date 1, intermediaries/firms need to raise at least
( – xs + b1s ) i0
xs < 0 is cash need for business operation
b1s > 0 is debt repayment
* Raise money in two ways:
o Sell capital (? )
o Borrow against capital (? )
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