Credit-Market Sentiment and the Business Cycle
Using U.S. data from 1929 to 2013, we show that elevated credit-market sentiment in year t – 2 is associated with a decline in economic activity in years t and t + 1. Underlying this result is the existence of predictable mean reversion in credit-market conditions. That is, when our sentiment proxies indicate that credit risk is aggressively priced, this tends to be followed by a subsequent widening of credit spreads, and the timing of this widening is, in turn, closely tied to the onset of a contraction in economic activity. Exploring the mechanism, we find that buoyant credit-market sentiment in year t – 2 also forecasts a change in the composition of external finance: net debt issuance falls in year t, while net equity issuance increases, patterns consistent with the reversal in credit-market conditions leading to an inward shift in credit supply. Unlike much of the current literature on the role of financial frictions in macroeconomics, this paper suggests that time-variation in expected returns to credit market investors can be an important driver of economic fluctuations.
We are grateful to Olivier Blanchard, Claudia Buch, Bill English, Robin Greenwood, Sam Hanson, Òscar Jordà, Arvind Krishnamurthy, Hélène Rey, Andrei Shleifer, and seminar participants at numerous institutions for helpful comments. Miguel Acosta, Ibraheem Catovic, Gregory Cohen, Shaily Patel, and Rebecca Zhang provided outstanding research assistance. The views expressed in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System, anyone else associated with the Federal Reserve System, or the National Bureau of Economic Research.
Jeremy C. Stein
Jeremy C. Stein
Outside (Non-Harvard) Activities Since 2006
A. Compensated Activities*
I have given paid talks for a number of financial firms, investor groups, academic institutions, and central banks.
BlueMountain Capital Management: consultant, 2015-present.
Guggenheim Partners: design of quantitative asset-management strategies, 2005-2007.
The Clearing House Association: unpublished paper with Anil Kashyap and Samuel Hanson, “An Analysis of the Impact of ‘Substantially Heightened’ Capital Requirements on Large Financial Institutions,” 2010.
Federal Reserve Board: Governor, May 2012-May 2014.
U.S. Treasury Department: Senior Advisor to the Secretary; and concurrently, staff of National Economic Council, February-July 2009.
Quarterly Journal of Economics: co-editor, 2011-2012.
Journal of Economic Perspectives: co-editor, 2007-2008.
Study Center, Gerzensee, Switzerland: summer-school course, 2011.
Northwestern University: visiting scholar, 2009.
B. Significant Non-Compensated Activities
Harvard Management Company: Board of Directors, 2015-present.
American Finance Association: President, 2008; President-Elect, 2007; Vice-President, 2006; Board of Directors, 2009-2011.
Financial Advisory Roundtable, Federal Reserve Bank of New York, 2006-2012.
Squam Lake Group, 2008-2012.
David López-Salido & Jeremy C. Stein & Egon Zakrajšek, 2017. "Credit-Market Sentiment and the Business Cycle*," The Quarterly Journal of Economics, vol 132(3), pages 1373-1426. citation courtesy of