COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1715R

The Leverage Cycle

John Geanakoplos

July 2009
Revised January 2010

Equilibrium determines leverage, not just interest rates. Variations in leverage cause fluctuations in asset prices. This leverage cycle can be damaging to the economy, and should be regulated.

Keywords: Leverage, Collateral, Cycle, Crisis, Regulation

JEL Classification: E3, E32, G01, G12