Scandinavian Working Papers in Economics
Umeå Economic Studies,
Umeå University, Department of Economics
No 836: The Credit Market and the Determinants of Credit Crunches: An Agent Based Modeling Approach
Ulf Holmberg ()
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Ulf Holmberg: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Abstract: This paper presents a credit market model and finds, using an agent based modeling approach, that credit crunches have a tendency to occur; even when credit markets are almost entirely transparent in the absence of external shocks. We find evidence supporting the asset deterioration hypothesis and results that emphasize the importance of accurate firm quality estimates. In addition, we find that an increase in the debt’s time to maturity, homogenous expected default rates and a conservative lending approach, reduces the probability of a credit crunch. Thus, our results suggest some up till now partially overlooked components contributing to the financial stability of an economy.
Keywords: financial stability; banking; lending; screening; truncation
28 pages, February 17, 2012
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