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Dynamic responses of real output to financial spreads

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  • Huang, Yu-Fan

Abstract

In this paper, we find that a positive term spread shock permanently increases real output in that the long-term trend rises. The mechanism is likely through the strong association between term spread shocks and total factor productivity news shocks. A positive credit spread shock could reflect heightening default risk and tightening credit supply, and both factors can lead to fewer new investment projects and damage the long-run economic capacity. We find that for credit spread shocks representing tightening credit supply conditions, the permanent effect is significant in a counterfactual case in which the public forecasts future short rates without considering credit spread. This finding suggests that the central bank's commitment to provide liquidity is important to prevent permanent output loss due to a shortage of credit.

Suggested Citation

  • Huang, Yu-Fan, 2019. "Dynamic responses of real output to financial spreads," International Review of Economics & Finance, Elsevier, vol. 62(C), pages 153-159.
    • Handle: RePEc:eee:reveco:v:62:y:2019:i:c:p:153-159
    DOI: 10.1016/j.iref.2019.03.007
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    Cited by:

    1. Lyócsa, Štefan & Výrost, Tomáš & Plíhal, Tomáš, 2021. "A tale of tails : New evidence on the growth-return nexus," Finance Research Letters, Elsevier, vol. 38(C).
    2. Zekeriya Yildirim & Mehmet Ivrendi, 2021. "Spillovers of US unconventional monetary policy: quantitative easing, spreads, and international financial markets," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-38, December.

    More about this item

    Keywords

    Credit spread; Term spread; Trend output; TFP news; Credit supply;
    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
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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