Equilibrium Credit Spreads and the Macroeconomy

46 Pages Posted: 6 Jun 2012

See all articles by Joao F. Gomes

Joao F. Gomes

The Wharton School

Lukas Schmid

University of Southern California - Marshall School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: October 1, 2010

Abstract

The Great Recession of 2008 offers a primary example of the important role that fluctuations in credit risk play in the aggregate economy. In this paper we explore this link with a tractable general equilibrium asset pricing model with heterogeneous firms. Our model produces realistic movements in risk premia in equity and corporate bond markets and shows how this is an important determinant of aggregate fluctuations following both technology and pure credit shocks. We also show that movements in credit spreads forecast recessions by predicting future movements in corporate investment.

Suggested Citation

Gomes, João F. and Schmid, Lukas, Equilibrium Credit Spreads and the Macroeconomy (October 1, 2010). The Wharton School Research Paper No. 42, Available at SSRN: https://ssrn.com/abstract=2078746

João F. Gomes (Contact Author)

The Wharton School ( email )

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Lukas Schmid

University of Southern California - Marshall School of Business ( email )

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Los Angeles, CA California 90089-1424
United States

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