Credit-Market Sentiment and the Business Cycle

David López-Salido, Jeremy C. Stein and Egon Zakrajšek ()

The Quarterly Journal of Economics, 2017, vol. 132, issue 3, 1373-1426

Abstract: Using U.S. data from 1929 to 2015, we show that elevated credit-market sentiment in year t − 2 is associated with a decline in economic activity in years t and t + 1. Underlying this result is the existence of predictable mean reversion in credit-market conditions. When credit risk is aggressively priced, spreads subsequently widen. The timing of this widening is, in turn, closely tied to the onset of a contraction in economic activity. Exploring the mechanism, we find that buoyant credit-market sentiment in year t − 2 also forecasts a change in the composition of external finance: net debt issuance falls in year t, while net equity issuance increases, consistent with the reversal in credit-market conditions leading to an inward shift in credit supply. Unlike much of the current literature on the role of financial frictions in macroeconomics, this article suggests that investor sentiment in credit markets can be an important driver of economic fluctuations.

JEL-codes: E32 E44 G12 (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations: View citations in EconPapers (124)

Downloads: (external link)
http://hdl.handle.net/10.1093/qje/qjx014 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Credit-Market Sentiment and the Business Cycle (2016)
Working Paper: Credit-Market Sentiment and the Business Cycle (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:qjecon:v:132:y:2017:i:3:p:1373-1426.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The Quarterly Journal of Economics is currently edited by Robert J. Barro, Lawrence F. Katz, Nathan Nunn, Andrei Shleifer and Stefanie Stantcheva

More articles in The Quarterly Journal of Economics from President and Fellows of Harvard College
Bibliographic data for series maintained by Oxford University Press ().