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What credit market indicators tell us

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  • John V. Duca

Abstract

John Duca shows that interest rate spreads and loan surveys should be interpreted carefully when assessing the availability of credit and its impact on the economy. This is especially true of interest rate spread indicators, some of which reflect prepayment, liquidity, or default risk premiums that have different economic implications. It can be helpful to decompose spreads before drawing economic inferences from the structure of interest rates. Spreads between yields on non-top-grade private-sector bonds and Treasury bonds, in particular, have a large prepayment premium in addition to a time-varying default risk premium. It is also important to recognize that even some decomposed spreads include more than one type of risk premium. In this regard, a widening of some yield spreads that contain a small default risk component, such as the Aaa-Treasury spread, could reflect a rise in prepayment or liquidity risk premiums, whose magnitudes may be hard to identify separately.

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Bibliographic Info

Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

Volume (Year): (1999)
Issue (Month): Q III ()
Pages: 2-13

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Handle: RePEc:fip:fedder:y:1999:i:qiii:p:2-13

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Keywords: Interest rates ; Credit;

References

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  1. John V. Duca, 1995. "Credit availability, bank consumer lending, and consumer durables," Working Papers 9514, Federal Reserve Bank of Dallas.
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Cited by:
  1. de Bondt, Gabe, 2002. "Euro area corporate debt securities market: first empirical evidence," Working Paper Series 0164, European Central Bank.
  2. Duca, John V., 2014. "What drives the shadow banking system in the short and long run?," Working Papers 1401, Federal Reserve Bank of Dallas.
  3. James H. Stock & Mark W.Watson, 2003. "Forecasting Output and Inflation: The Role of Asset Prices," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 788-829, September.
  4. Simon Gilchrist & Vladimir Yankov & Egon Zakrajsek, 2009. "Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets," NBER Working Papers 14863, National Bureau of Economic Research, Inc.
  5. Gabe de Bondt, 2004. "The balance sheet channel of monetary policy: first empirical evidence for the euro area corporate bond market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(3), pages 219-228.
  6. Buchmann, Marco, 2011. "Corporate bond spreads and real activity in the euro area - Least Angle Regression forecasting and the probability of the recession," Working Paper Series 1286, European Central Bank.
  7. Zhiwei Zhang, 2002. "Corporate Bond Spreads and the Business Cycle," Working Papers 02-15, Bank of Canada.
  8. Duca, John V., 2010. "Did the Commercial Paper Funding Facility Prevent a Great Depression Style Money Market Meltdown?," MPRA Paper 29255, University Library of Munich, Germany, revised 22 Feb 2011.
  9. Illing, Mark & Liu, Ying, 2006. "Measuring financial stress in a developed country: An application to Canada," Journal of Financial Stability, Elsevier, vol. 2(3), pages 243-265, October.
  10. Hartmann, Daniel & Kempa, Bernd & Pierdzioch, Christian, 2006. "Economic and Financial Crises and the Predictability of U.S. Stock Returns," MPRA Paper 561, University Library of Munich, Germany.
  11. Mark Illing & Ying Liu, 2003. "An Index of Financial Stress for Canada," Working Papers 03-14, Bank of Canada.
  12. Michael Bleaney & Paul Mizen & Veronica Veleanu, . "Bond Spreads as Predictors of Economic Activity in Eight European Economies," Discussion Papers 12/11, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  13. Craig S. Hakkio & William R. Keeton, 2009. "Financial stress: what is it, how can it be measured, and why does it matter?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-50.
  14. Chuderewicz, Russell P., 2002. "Using interest rate uncertainty to predict the paper-bill spread and real output," Journal of Economics and Business, Elsevier, vol. 54(3), pages 293-312.
  15. Michael Bleaney & Paul Mizen & Veronica Veleanu, 2013. "Bond Spreads and Economic Activity in Eight European Economies," Discussion Papers 2013/09, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  16. Prakash Kannan, 2010. "Credit Conditions and Recoveries From Recessions Associated with Financial Crises," IMF Working Papers 10/83, International Monetary Fund.
  17. Kannan, Prakash, 2012. "Credit conditions and recoveries from financial crises," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 930-947.

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