Please use this identifier to cite or link to this item:
Koopman, Siem Jan
Lucas, André
Year of Publication: 
Series/Report no.: 
Tinbergen Institute Discussion Paper 03-062/2
Various economic theories are available to explain the existence of credit and default cycles. There remains empirical ambiguity, however, as to whether or these cycles coincide. Recent papers_new suggest by their empirical research set-up that they do, or at least that defaults and credit spreads tend to co-move with macro-economic variables. If true, this is important for credit risk management as well as for regulation and systemic risk management. In this paper, we use 1927-1997 U.S. data on real GDP, credit spreads, and business failure rates to shed new light on the empirical evidence. We use a multivariate unobserved components framework to disentangle credit from business cycles. It turns out that cyclical co-movements arise between default rates, but not real GDP. There is, however, a contemporaneous correlation between real GDP and default rates. Regarding the longer term evolution of the series, credit spreads influence default rates and real GDP, but not vice versa. This corroborates some of the empirical findings in the recent literature on the correlation between macrovariables and default rates. It also suggests the use of credit spreads besides or instead of economic growth rates to forecast the dynamics of future default rates.
credit cycles
business cycles
credit risk
multivariate unobserved component models.
Document Type: 
Working Paper

Files in This Item:
268.56 kB

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.