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

19 Pages Posted: 4 Jul 2015 Last revised: 22 Sep 2016

See all articles by Pierre-Richard Agnor

Pierre-Richard Agnor

The University of Manchester

George J. Bratsiotis

The University of Manchester

Damjan Pfajfar

Board of Governors of the Federal Reserve System

Date Written: June 1, 2012

Abstract

This paper examines the impact of monetary shocks on the loan spread in a DSGE model that combines the cost channel effect of monetary transmission with the role of collateral under asymmetric information. Its key feature is the endogenous derivation of the default probability that results in a lending rate being set as a countercyclical risk premium over the cost of borrowing from the central bank. The endogenous probability of default is shown to provide an accelerator effect through which monetary shocks can amplify the loan spread. The behavior of the spread appears to be consistent with existing empirical evidence.

Keywords: Credit Frictions; Business Cycles; Collateral; Finance Premium; DSGE

JEL Classification: E31, E44, E52

Suggested Citation

Agnor, Pierre-Richard and Bratsiotis, George John and Pfajfar, Damjan, Credit Frictions, Collateral and the Cyclical Behavior of the Finance Premium (June 1, 2012). Macroeconomic Dynamics, Vol. 18, No. 05, 2014, Available at SSRN: https://ssrn.com/abstract=2626394

Pierre-Richard Agnor

The University of Manchester

Oxford Road
Manchester, N/A M13 9PL
United Kingdom

George John Bratsiotis (Contact Author)

The University of Manchester ( email )

Oxford Road
Manchester, N/A M13 9PL
United Kingdom

Damjan Pfajfar

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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