Credit Frictions, Collateral and the Cyclical Behavior of the Finance Premium
19 Pages Posted: 4 Jul 2015 Last revised: 22 Sep 2016
Date Written: June 1, 2012
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
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