Credit frictions, collateral and the cyclical behavior of the finance premium

P.-R. Agénor, G. Bratsiotis, D. Pfajfar

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This paper examines the behavior of the finance premium after 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 well-documented stylized facts of macro dynamics. A key feature is the endogenous derivation of the default probability from break-even conditions, which 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.
Original languageEnglish
Pages (from-to)985-997
JournalMacroeconomic Dynamics
Volume18
Issue number5
DOIs
Publication statusPublished - Jul 2014

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Finance
Credit frictions
Premium
Technology shocks
Loans
Central bank
Loan rates
Dynamic stochastic general equilibrium model
Stylized facts
Borrowing
Default probability
Dynamic response
Monetary shocks
Costs

Keywords

  • credit frictions
  • business cycles
  • collateral
  • finance premium

Cite this

Agénor, P.-R. ; Bratsiotis, G. ; Pfajfar, D. / Credit frictions, collateral and the cyclical behavior of the finance premium. In: Macroeconomic Dynamics. 2014 ; Vol. 18, No. 5. pp. 985-997.
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Credit frictions, collateral and the cyclical behavior of the finance premium. / Agénor, P.-R.; Bratsiotis, G.; Pfajfar, D.

In: Macroeconomic Dynamics, Vol. 18, No. 5, 07.2014, p. 985-997.

Research output: Contribution to journalArticleScientificpeer-review

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