Most aggregate theories of financial frictions model credit available at a cost of financing equal to the savings rate but rationed. However, using a comprehensive loan-level credit registry, we document both high levels and high dispersion in default-adjusted credit spreads to Brazilian firms. We develop a quantitative dynamic general equilibrium model in which spreads arise from intermediation costs and market power. Calibrating to the Brazilian data, we show that, for equivalent levels of external financing, spreads have profound impacts on aggregate development—indeed more so than credit rationing does—and spreads yield firm dynamics that are consistent with observed patterns.
STEG Working Paper Series
• Research Theme 0: Data, Measurement, and Conceptual Framing,
Research Theme 1: Firms, Frictions and Spillovers, and Industrial Policy
Financing Costs and Development
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