Credit Frictions, Collateral and the Cyclical Behaviour of the Finance Premium
This paper examines the behaviour of the finance premium following 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 macro dynamics of well-documented stylized facts. A key feature is the endogenous derivation of the default probability from break even conditions, that 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.
|Date of creation:||2012|
|Date of revision:|
|Contact details of provider:|| Postal: Manchester M13 9PL|
Phone: (0)161 275 4868
Fax: (0)161 275 4812
Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/our-research/centre-for-growth-and-business-cycle-research/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- De Graeve, Ferre, 2008.
"The external finance premium and the macroeconomy: US post-WWII evidence,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 32(11), pages 3415-3440, November.
- F. Degraeve, 2007. "The External Finance Premium and the Macroeconomy: US post-WWII Evidence," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 07/482, Ghent University, Faculty of Economics and Business Administration.
- Ferre De Graeve, 2006. "The External Finance Premium and the Macroeconomy: US post-WWII Evidence," Computing in Economics and Finance 2006 84, Society for Computational Economics.
- Graeve, Ferre De, 2008. "The external finance premium and the macroeconomy: US post-WWII evidence," Working Papers 0809, Federal Reserve Bank of Dallas.
- De Graeve Ferre, 2007. "The External Finance Premium and the Macroeconomy: US post-WWII Evidence," Money Macro and Finance (MMF) Research Group Conference 2006 83, Money Macro and Finance Research Group.
- Tommaso Monacelli & Ester Faia, 2005.
"Optimal Interest Rate Rules, Asset Prices and Credit Frictions,"
Computing in Economics and Finance 2005
452, Society for Computational Economics.
- Faia, Ester & Monacelli, Tommaso, 2007. "Optimal interest rate rules, asset prices, and credit frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3228-3254, October.
- Aoki, Kosuke & Benigno, Gianluca & Kiyotaki, Nobuhiro, 2010.
"Adjusting to Capital Account Liberalization,"
CEPR Discussion Papers
8087, C.E.P.R. Discussion Papers.
- Mojon, Benoît & Peersman, Gert, 2001. "A VAR description of the effects of monetary policy in the individual countries of the euro area," Working Paper Series 0092, European Central Bank.
When requesting a correction, please mention this item's handle: RePEc:man:cgbcrp:172. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marianne Sensier)
If references are entirely missing, you can add them using this form.