| Abstract: | The market for high-yield (below-investment-grade) corporatebonds developed in the middle 1980s. We show that, since thistime, the high-yield spread has had significant explanatorypower for the business cycle. We interpret this finding as possiblysymptomatic of financial factors at work in the business cycle,along the lines suggested by the financial accelerator. We alsoshow that over this period the high-yield spread outperformsother leading financial indicators, including the term spread,the paper-bill spread, and the Federal Funds rate. We conjecturethat changes in the conduct of monetary policy over time mayaccount for the reduced informativeness of these alternativeindicators, all of which are tied closely to monetary policy. |
