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American Economic Journal: Macroeconomics: Vol. 5 No. 3 (July 2013)

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Credit Risk and Disaster Risk

Article Citation

Gourio, François. 2013. "Credit Risk and Disaster Risk." American Economic Journal: Macroeconomics, 5(3): 1-34.

DOI: 10.1257/mac.5.3.1

Abstract

Credit spreads are large, volatile, and countercyclical, and recent empirical work suggests that risk premia, not expected credit losses, are responsible for these features. Building on the idea that corporate debt, while fairly safe in ordinary recessions, is exposed to economic depressions, this paper embeds a trade-off theory of capital structure into a real business cycle model with a small, exogenously timevarying risk of economic disaster. The model replicates the level, volatility and cyclicality of credit spreads, and variation in the corporate bond risk premium amplifies macroeconomic fluctuations in investment, employment, and GDP.

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Authors

Gourio, François (Federal Reserve Bank of Chicago and Boston U)

JEL Classifications

E13: General Aggregative Models: Neoclassical
E22: Capital; Investment; Capacity
E23: Macroeconomics: Production
E24: Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
E32: Business Fluctuations; Cycles
E44: Financial Markets and the Macroeconomy
G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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American Economic Journal: Macroeconomics


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