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The Global Credit Cycle

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Abstract

Do global credit conditions affect local credit and business cycles? Using a large cross-section of equity and corporate bond market returns around the world, we construct a novel global credit factor and a global risk factor that jointly price the international equity and bond cross-section. We uncover a global credit cycle in risky asset returns, which is distinct from the global risk cycle. We document that the global credit cycle in asset returns translates into a global credit cycle in credit quantities, with a tightening in global credit conditions predicting extreme capital flow episodes and declines in the stock of country-level private debt. Furthermore, global credit conditions predict the mean and left tail of real GDP growth outcomes at the country level. Thus, the global pricing of corporate credit is a fundamental factor in driving local credit conditions and real outcomes.

Suggested Citation

  • Nina Boyarchenko & Leonardo Elias, 2024. "The Global Credit Cycle," Staff Reports 1094, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:98024
    DOI: 10.59576/sr.1094
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    References listed on IDEAS

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    1. Andrew Ang & Geert Bekaert, 2007. "Stock Return Predictability: Is it There?," The Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 651-707.
    2. Filippo di Mauro & L. Vanessa Smith & Stephane Dees & M. Hashem Pesaran, 2007. "Exploring the international linkages of the euro area: a global VAR analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 1-38.
    3. Bao, Jack & Hou, Kewei & Zhang, Shaojun, 2023. "Systematic default and return predictability in the stock and bond markets," Journal of Financial Economics, Elsevier, vol. 149(3), pages 349-377.
    4. Atif Mian & Amir Sufi & Emil Verner, 2017. "Household Debt and Business Cycles Worldwide," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(4), pages 1755-1817.
    5. Campbell, John Y. & Giglio, Stefano & Polk, Christopher & Turley, Robert, 2018. "An intertemporal CAPM with stochastic volatility," Journal of Financial Economics, Elsevier, vol. 128(2), pages 207-233.
    6. Maxime Leboeuf & Daniel Hyun, 2018. "Is the Excess Bond Premium a Leading Indicator of Canadian Economic Activity?," Staff Analytical Notes 2018-4, Bank of Canada.
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    1. Bernini Federico Gastón & Donaldson Paula & Garcia-Lembergman Ezequiel & Juárez Leticia, 2024. "The Financial Channel of Tax Amnesty Policies," Asociación Argentina de Economía Política: Working Papers 4710, Asociación Argentina de Economía Política.

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    More about this item

    Keywords

    global financial cycle; corporate bond returns; return predictability; international capital flows; credit and real activity outcomes;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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