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The cyclicality of the finance premium over the business cycle

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  • Bratsiotis, George J.
  • Kalubowila, Chashika D.

Abstract

This paper examines the main determinants of the cyclicality of the finance premium in the cost channel framework, which has received less attention in the literature. We decompose the finance premium into a cost effect and a leverage effect. We show that in both the cost channel model and the credit channel model (Bernanke, Gertler and Gilchrist 1999), the cyclicality of the finance premium is determined mainly by the size and sign of the leverage effect. Some key factors that determine the leverage effect are, the nature of shocks, the degree of loan persistence in relation to output or net worth, and the stance of monetary policy.

Suggested Citation

  • Bratsiotis, George J. & Kalubowila, Chashika D., 2025. "The cyclicality of the finance premium over the business cycle," Economic Modelling, Elsevier, vol. 142(C).
    • Handle: RePEc:eee:ecmode:v:142:y:2025:i:c:s0264999324003006
    DOI: 10.1016/j.econmod.2024.106943
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    More about this item

    Keywords

    Credit frictions; Cost channel; Credit channel; Finance premium; Monetary policy; Business cycles;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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