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Oxf Rev Econ Policy 1999; 15:132-150
© 1999 Oxford University Press and Oxford Review of Economic Policy Ltd

Article

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

M Gertler0
CS Lown1
0 New York University, NY, USA
NBER
1 Federal Reserve Bank of New York, NY, USA

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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