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The Credit Spread Cycle with Matching Friction

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  • Kevin E. Beaubrun-Diant

    (LEDA-SDFi - LEDA-SDFi - Université Paris-Dauphine)

  • Fabien Tripier

    (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - UN - Université de Nantes)

Abstract

We herein advance a contribution to the theoretical literature on financial frictions and show the significance of the matching mechanism in explaining the countercyclical behavior of interest rate spreads. We demonstrate that when matching friction is associated with a Nash bargaining solution, it provides a satisfactory explanation of the credit spread cycle in response to shocks in production technology or in the cost of banks' resources. During periods of expansion, the credit spread experiences a tightening for two reasons. Firstly, as a result of easier access to loans, entrepreneurs have better opportunities outside a given lending relationship and can negotiate lower interest rates. Secondly, the less selective behavior of entrepreneurs and banks results in the occurrence of fewer productive matches, a fall in the average productivity of matches, and a tightening of the credit spread. Our results also underline the amplification and propagation properties of matching friction, which represent a powerful financial accelerator mechanism.

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  • Kevin E. Beaubrun-Diant & Fabien Tripier, 2009. "The Credit Spread Cycle with Matching Friction," Working Papers hal-00430809, HAL.
  • Handle: RePEc:hal:wpaper:hal-00430809
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00430809
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    Cited by:

    1. Florian, David & Limnios, Chris & Walsh, Carl, 2018. "Monetary policy operating procedures, lending frictions, and employment," Working Papers 2018-001, Banco Central de Reserva del Perú.

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