Journal Article

The information in the high-yield bond spread for the business cycle: evidence and some implications

M Gertler and CS Lown

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 15, issue 3, pages 132-150
Published in print September 1999 | ISSN: 0266-903X
Published online September 1999 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/15.3.132
The information in the high-yield bond spread for the business cycle: evidence and some implications

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  • Economic Development and Growth
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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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Subjects: Economic Development and Growth ; Public Economics ; Political Economy ; Public Policy

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