Credit Frictions, Collateral and the Cyclical Behaviour of the Finance Premium

Pierre-Richard Agénor, George Bratsiotis () and Damjan Pfajfar

Centre for Growth and Business Cycle Research Discussion Paper Series from Economics, The University of Manchester

Abstract: This paper examines the behaviour of the finance premium following technology and monetary shocks in a Dynamic Stochastic General Equilibrium (DSGE) model where borrowers use a fraction of their production (output) as collateral. We show that this simple framework is capable of producing a countercyclical finance premium, while matching the macro dynamics of well-documented stylized facts. A key feature is the endogenous derivation of the default probability from break even conditions, that results in the loan rate being set as a countercyclical finance premium over the cost of borrowing from the central bank. The latter is shown to provide an accelerator effect through which shocks can amplify the loan spread and the dynamic response of macro variables.

Pages: 20 pages
Date: 2012
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
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Citations: View citations in EconPapers (10)

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Related works:
Journal Article: CREDIT FRICTIONS, COLLATERAL, AND THE CYCLICAL BEHAVIOR OF THE FINANCE PREMIUM (2014)
Journal Article: Credit Frictions, Collateral and the Cyclical Behavior of the Finance Premium (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:man:cgbcrp:172

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