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Credit spread variability in U.S. business cycles: the Great Moderation versus the Great Recession

Author

Listed:
  • Hylton Hollander

    (Department of Economics, University of Stellenbosch)

  • Guangling Liu

    (Department of Economics, University of Stellenbosch)

Abstract
This paper establishes the prevailing financial factors that influence credit spread variability, and its impact on the U.S. business cycle over the Great Moderation and Great Recession periods. To do so, we develop a dynamic general equilibrium framework with a central role of financial intermediation and equity assets. Over the Great Moderation and Great Recession periods, we find an important role for bank market power (sticky rate adjustments and loan rate markups) on credit spread variability in the U.S. business cycle. Equity prices exacerbate movements in credit spreads through the financial accelerator channel, but cannot be regarded as a main driving force of credit spread variability. Both the financial accelerator and bank capital channels play a significant role in propagating the movements of credit spreads. We observe a remarkable decline in the influence of technology and monetary policy shocks over three recession periods. From the demand-side of the credit market, the influence of LTV shocks has declined since the 1990 - 91 recession, while the bank capital requirement shock exacerbates and prolongs credit spread variability over the 2007 - 09 recession period. Across the three recession periods, there is an increasing trend in the contribution of loan markup shocks to the variability of retail credit spreads.

Suggested Citation

  • Hylton Hollander & Guangling Liu, 2014. "Credit spread variability in U.S. business cycles: the Great Moderation versus the Great Recession," Working Papers 15/2014, Stellenbosch University, Department of Economics.
    • Handle: RePEc:sza:wpaper:wpapers220
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    References listed on IDEAS

    as
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    Cited by:

    1. Contessi, Silvio & De Pace, Pierangelo & Guidolin, Massimo, 2020. "Mildly explosive dynamics in U.S. fixed income markets," European Journal of Operational Research, Elsevier, vol. 287(2), pages 712-724.
    2. Hylton Hollander & Dawie van Lill, 2019. "A Review of the South African Reserve Bank’s Financial Stability Policies," Working Papers 11/2019, Stellenbosch University, Department of Economics.
    3. Rong-Xi Zhou & Ya-Hui Xiong & Tian-Hao Liu & Jing Li, 2019. "Macroeconomic Determinants of Credit Spreads: An Empirical Comparison between Chinese and American Corporate Bonds," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 9(5), pages 604-616, May.

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    More about this item

    Keywords

    financial intermediation; credit spreads; financial frictions; great recession;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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