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Do credit market shocks drive output fluctuations? Evidence from corporate spreads and defaults

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  • Meeks, Roland

Abstract

Are exogenous shocks to lending spreads in corporate credit markets a substantial source of macroeconomic fluctuations? An alternative explanation of the data is that borrowing costs respond endogenously to expectations of future default, driven by macroeconomic shocks. We investigate by imposing restrictions on a structural vector autoregression that isolate the influence of expected default on spreads. We find that adverse credit shocks have contributed to declining output in every post-1982 recession, and account for three-fifths of the decline in output during the 2007–2009 contraction. However, on average credit shocks account for only a fifth of business cycle fluctuations.

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  • Meeks, Roland, 2012. "Do credit market shocks drive output fluctuations? Evidence from corporate spreads and defaults," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 568-584.
    • Handle: RePEc:eee:dyncon:v:36:y:2012:i:4:p:568-584
    DOI: 10.1016/j.jedc.2011.11.010
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    More about this item

    Keywords

    Corporate bond spreads; Default rates; Sign restrictions; Bayesian vector autoregression;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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