IDEAS home Printed from https://ideas.repec.org/a/oup/econjl/v130y2020i626p534-553..html
   My bibliography  Save this article

Financial Development, Default Rates and Credit Spreads

Author

Listed:
  • Alessandro Peri
  • Omar Rachedi

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.

Suggested Citation

  • Alessandro Peri & Omar Rachedi, 2020. "Financial Development, Default Rates and Credit Spreads," The Economic Journal, Royal Economic Society, vol. 130(626), pages 534-553.
    • Handle: RePEc:oup:econjl:v:130:y:2020:i:626:p:534-553.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/ej/uez049
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:econjl:v:130:y:2020:i:626:p:534-553.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press or the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/resssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.