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The Information in the High Yield Bond Spread for the Business Cycle: Evidence and Some Implications

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  • 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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7549.

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Date of creation: Feb 2000
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Publication status: published as Gertler, Mark & Lown, Cara S, 1999. "The Information in the High-Yield Bond Spread for the Business Cycle: Evidence and Some Implications," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 132-50, Autumn.
Handle: RePEc:nbr:nberwo:7549

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  1. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
  2. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-03, C.V. Starr Center for Applied Economics, New York University.
  3. Ben S. Bernanke & Ilian Mihov, 1995. "Measuring Monetary Policy," NBER Working Papers 5145, National Bureau of Economic Research, Inc.
  4. Ben S. Bernanke & Mark Gertler & Mark Watson, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 91-157.
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  6. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
  7. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(2), pages 228-48, April.
  8. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc.
  9. Benjamin M. Friedman & Kenneth N. Kuttner, 1998. "Indicator Properties Of The Paper-Bill Spread: Lessons From Recent Experience," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 34-44, February.
  10. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
  11. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 14-31, March.
  12. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1, July.
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  14. Anil K. Kashyap & Jeremy C. Stein & David W. Wilcox, 1991. "Monetary policy and credit conditions: evidence from the composition of external finance," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 154, Board of Governors of the Federal Reserve System (U.S.).
  15. Frederic S. Mishkin, 1991. "Asymmetric Information and Financial Crises: A Historical Perspective," NBER Chapters, in: Financial Markets and Financial Crises, pages 69-108 National Bureau of Economic Research, Inc.
  16. Marc R. Saidenberg & Philip E. Strahan, 1999. "Are banks still important for financing large businesses?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 5(Jul).
  17. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, American Economic Association, vol. 82(3), pages 472-92, June.
  18. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  19. Michael Dotsey, 1998. "The predictive content of the interest rate term spread for future economic growth," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Sum, pages 31-51.
  20. Muellbauer, John N J, 1996. "Income Persistence and Macro-Policy Feedbacks in the U.S," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 58(4), pages 703-33, November.
  21. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 9(4), pages 27-48, Fall.
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  1. > Econometrics > Forecasting > Forecasting Economic Activity Using Financial Variables
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