Working Paper: NBER ID: w7549
Authors: Mark Gertler; Cara S. Lown
Abstract: The market for high yield (below investment-grade) corporate bonds developed in the middle 1980s. We show that, since this time, the high yield spread has had significant explanatory power for the business cycle. We interpret this finding as possibly symptomatic of financial factors at work in the business cycle, along the lines suggested by the financial accelerator. We also show that over this period the high yield spread outperforms other leading financial indicators, including the term spread, the paper-bill spread and the Federal Funds rate. We conjecture that changes in the conduct of monetary policy over time may account for the reduced informativeness of these alternative indicators, all of which are tied closely to monetary policy.
Keywords: No keywords provided
JEL Codes: E37; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial conditions (E66) | business cycle activity (E32) |
| net interest burden (F34) | economic activity (E20) |
| monetary policy shocks (E39) | real GDP (E20) |
| high yield bond spread (G12) | output gap (E23) |
| high yield bond spread (G12) | future economic activity (E66) |
| high yield bond spread (G12) | financial conditions (E66) |
| high yield bond spread (G12) | net interest burden (F34) |