Credit Market Frictions and the Linkage Between Dispersion and Macro Uncertainty.

This article focuses on the relationship between cross-sectional dispersion of firm-level productivity and macroeconomic uncertainty, emphasizing how credit market frictions endogenously link these two distinct but empirically correlated phenomena. It develops a general equilibrium model incorporating endogenous growth and recursive preferences, showing that increased dispersion leads to more firm defaults, higher aggregate leverage, and amplified macroeconomic volatility through a leverage and risk premium channel. Empirical evidence from aggregate and industry-level data supports the model's mechanism that dispersion shocks raise aggregate volatility via increased leverage. The study further suggests that government equity injections into the corporate sector during periods of high credit spreads can stabilize aggregate volatility by mitigating defaults, yielding significant welfare gains in economies with endogenous growth.