A Simple Model of Credit Expansion

TL;DR

This paper introduces a simplified financial model that captures regular credit cycles characterized by debt bubbles and crises, highlighting the periodic and stochastic nature of financial expansions.

Contribution

It presents a basic model illustrating the cyclical patterns of credit expansion and crises, emphasizing the structured yet stochastic behavior of financial systems.

Findings

Identification of regular credit cycles with debt bubbles and crises

Structured periodic sequences in credit expansion

Stochastic timing of financial crises

Abstract

The proposed model is aimed to reveal important patterns in the behavior of a simplified financial system. The patterns could be detected as regular cycles consisting of debt bubbles and crises. Financial cycles have a well defined structure and form periodic sequences along the axis of credit expansion while retaining stochastic nature in terms of time.