Why does the paper-bill spread predict real economic activity?
Evidence based on the past three decades of U.S. experience shows that the difference between the interest rates on commercial paper and Treasury bills has consistently borne a systematic relationship to subsequent fluctuations of nonfinancial economic activity. This interest rate spread typically widens in advance of recessions, and narrows again before recoveries. The relationship remains valid even after allowance for other financial variables that previous researchers have often advanced as potential business cycle predictors. This paper provides support for each of three different explanations for this predictive power of the paper?bill spread. First, changing perceptions of default risk exert a clearly recognizable influence on the spread. This influence is all the more discernable after allowance for effects associated with the changing volume of paper issuance when investors view commercial paper and Treasury bills as imperfect portfolio substitutes -- a key assumption for which the evidence introduced here provides support. Second, again under conditions of imperfect substitutability, a widening paper-bill spread is also a symptom of the contraction in bank lending due to tighter monetary policy. Third, there is also evidence of a further role for independent changes in the behavior of borrowers in the commercial paper market due to their changing cash requirements over the course of the business cycle.
(This abstract was borrowed from another version of this item.)
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||1991|
|Date of revision:|
|Contact details of provider:|| Postal: P.O. Box 834, 230 South LaSalle Street, Chicago, Illinois 60690-0834|
Web page: http://www.chicagofed.org/
More information through EDIRC
|Order Information:|| Web: http://www.chicagofed.org/webpages/publications/print_publication_order_form.cfm Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Anil K Kashyap & Jeremy C. Stein & David W. Wilcox, 1992.
"Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance,"
NBER Working Papers
4015, National Bureau of Economic Research, Inc.
- Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, vol. 83(1), pages 78-98, March.
- 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 154, Board of Governors of the Federal Reserve System (U.S.).
- Bernanke, Ben S & Blinder, Alan S, 1992.
"The Federal Funds Rate and the Channels of Monetary Transmission,"
American Economic Review,
American Economic Association, vol. 82(4), pages 901-21, September.
- Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
- Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
- Stock, J.H. & Watson, M.W., 1989.
"New Indexes Of Coincident And Leading Economic Indicators,"
178d, Harvard - J.F. Kennedy School of Government.
- James H. Stock & Mark W. Watson, 1989. "New Indexes of Coincident and Leading Economic Indicators," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409 National Bureau of Economic Research, Inc.
- Romer, Christina D. & Romer, David H., 1989.
"Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz,"
Department of Economics, Working Paper Series
qt5h07k8vf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 121-184 National Bureau of Economic Research, Inc.
- Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Working Papers 2966, National Bureau of Economic Research, Inc.
- Christina D. Romer and David H. Romer., 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," Economics Working Papers 89-107, University of California at Berkeley.
- Ben Bernanke, 1990.
"On the Predictive Power of Interest Rates and Interest Rate Spreads,"
NBER Working Papers
3486, National Bureau of Economic Research, Inc.
- Ben S. Bernanke, 1990. "On the predictive power of interest rates and interest rate spreads," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 51-68.
- Benjamin M. Friedman, 1990. "Implications of Corporate Indebtedness for Monetary Policy," NBER Working Papers 3266, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:fip:fedhma:91-16. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bernie Flores)
If references are entirely missing, you can add them using this form.