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- Title
CREDIT FRICTIONS, COLLATERAL, AND THE CYCLICAL BEHAVIOR OF THE FINANCE PREMIUM.
- Authors
Agénor, Pierre-Richard; Bratsiotis, George J.; Pfajfar, Damjan
- 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.
- Subjects
CREDIT; INSURANCE premium financing; STOCHASTIC models; ECONOMIC equilibrium; DEFAULT (Finance); BUSINESS cycles
- Publication
Macroeconomic Dynamics, 2014, Vol 18, Issue 5, p985
- ISSN
1365-1005
- Publication type
Article
- DOI
10.1017/S1365100512000715