Credit-Market Sentiment and the Business Cycle
David Lopez-Salido (),
Jeremy Stein () and
Egon Zakrajsek ()
No 21879, NBER Working Papers from National Bureau of Economic Research, Inc
Using U.S. data from 1929 to 2013, 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. That is, when our sentiment proxies indicate that credit risk is aggressively priced, this tends to be followed by a subsequent widening of credit spreads, and 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, patterns 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 paper suggests that time-variation in expected returns to credit market investors can be an important driver of economic fluctuations.
JEL-codes: E32 E44 G12 (search for similar items in EconPapers)
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Published as David López-Salido & Jeremy C. Stein & Egon Zakrajšek, 2017. "Credit-Market Sentiment and the Business Cycle*," The Quarterly Journal of Economics, vol 132(3), pages 1373-1426.
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Journal Article: Credit-Market Sentiment and the Business Cycle (2017)
Working Paper: Credit-Market Sentiment and the Business Cycle (2016)
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