@article{9ca7cb10fa3b40678aa93fb66b0e1211,
title = "Financial Development, Default Rates and Credit Spreads",
abstract = "US corporate default rates increased dramatically from an annual average of 0.32% between 1950 and 1984 up to 1.65% since 1985. Meanwhile, credit spreads rose by just 6 basis points. We argue that financial development-intended as an exogenous reduction in the fixed cost of borrowing-accounts for this evidence. In a heterogeneous firm model financial development boosts both default rates and firms' expected recovery rates. These two effects offset each other, muting the change in the credit spreads. The model explains 63% of the rise in default rates and predicts a 6 basis point drop in the credit spreads.",
author = "Alessandro Peri and Omar Rachedi",
note = "Funding Information: We would like to acknowledge comments from the Editor (Morten Ravn), two anonymous referees, Isaac Baley, Marco Celentani, James Costain, Luca Del Viva, Antonia Diaz, Juanjo Dolado, Andres Erosa, Juan Francisco Jimeno, Matthias Kredler, David Martinez Miera, Salvador Ortigueira, Loris Rubini, Manuel Santos, Nawid Siassi, Ctirad Slavik, and presentation participants at ESADE, Universidad Carlos III de Madrid, and the XXI Finance Forum in Segovia. The views expressed in this article are those of the authors and do not necessarily represent the views of the Banco de Espa{\~n}a or the Eurosystem. This research: (i) was done using the computing resources of the Open Science Grid, which is funded jointly by the National Science Foundation and the Department of Energy; (ii) utilised the RMACC Summit supercomputer, which is supported by the National Science Foundation (awards ACI-1532235 and ACI-1532236), the University of Colorado Boulder and Colorado State University. The Summit supercomputer is a joint effort of the University of Colorado Boulder and Colorado State University; (iii) used the Extreme Science and Engineering Discovery Environment (XSEDE) Bridges at PSC (Pittsburgh Supercomputer Center) and Comet at SDSC (San Diego Supercomputer Center) through allocation TG-SES180009—described in Towns, J., Cockerill, T., Dahan, M., Foster, I., Gaither, K., Grimshaw, A., Hazlewood, V., Lathrop, S., Lifka, D., Peterson, G., Roskies, T., Scott, J. and Wilkins-Diehr, N. (2014). {\textquoteleft}XSEDE: Accelerating Scientific Discovery{\textquoteright}, Computing in Science & Engineering, vol. 16(5), pp. 62–74—which is supported by National Science Foundation grant number ACI-1548562. Publisher Copyright: {\textcopyright} 2020 2019 Royal Economic Society. Published by Oxford University Press.",
year = "2020",
month = feb,
day = "1",
doi = "10.1093/ej/uez049",
language = "English",
volume = "130",
pages = "534--553",
journal = "Economic Journal",
issn = "0013-0133",
publisher = "Wiley-Blackwell",
number = "626",
}