Working Paper: NBER ID: w23704
Authors: Joo F. Gomes; Marco Grotteria; Jessica A. Wachter
Abstract: A growing literature shows that credit indicators forecast aggregate real outcomes. While researchers have proposed various explanations, the economic mechanism behind these results remains an open question. In this paper, we show that a simple, frictionless, model explains empirical findings commonly attributed to credit cycles. Our key assumption is that firms have heterogeneous exposures to underlying economy-wide shocks. This leads to endogenous dispersion in credit quality that varies over time and predicts future excess returns and real outcomes.
Keywords: credit cycles; investment; macroeconomic aggregates; expected default frequency
JEL Codes: E32; G12; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial behavior of firms (G32) | broader economic outcomes (F69) |
| spikes in dispersion in credit quality (E32) | economic performance during recessions (F44) |
| dispersion in credit quality (L15) | asset prices (G19) |
| dispersion in credit quality (L15) | macroeconomic aggregates (E10) |
| dispersion in credit quality (L15) | excess returns on investment-grade and high-yield corporate bonds (G12) |
| dispersion in credit quality (L15) | future quarterly GDP growth (O49) |
| dispersion in credit quality (L15) | investment growth (E20) |