Working Paper: CEPR ID: DP15930
Authors: Tiago Cavalcanti; Joseph Kaboski; Bruno Martins; Cezar Santos
Abstract: Most aggregate theories of financial frictions model credit available at a cost of financing equal to the savings rate but rationed. However, using a comprehensive loan-level credit registry, we document both high levels and high dispersion in default-adjusted credit spreads to Brazilian firms. We develop a quantitative dynamic general equilibrium model in which spreads arise from intermediation costs and market power. Calibrating to the Brazilian data, we show that, for equivalent levels of external financing, spreads have profound impacts on aggregate development, indeed more so than credit rationing does, and spreads yield firm dynamics that are consistent with observed patterns.
Keywords: financial frictions; credit spreads; aggregate misallocation
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| turning off quantity constraints (C69) | GDP (E20) |
| dispersion in credit spreads (G19) | aggregate development (C43) |
| external financing (G32) | dispersion in credit spreads (G19) |
| dispersion in credit spreads (G19) | varied growth patterns among firms (L25) |
| financial frictions (G19) | output per capita (E23) |
| financial frictions (G19) | wages (J31) |