Briefing
Sentiment About Business Debt as a Leading Economic Indicator
Abstract: Understanding the sources and transmission of financial distress in the economy is essential for macroeconomic stabilization policy. For example, policymakers and academics have both pointed to excesses in credit markets — including abnormally low risk premiums, misaligned incentives for risk taking, lax credit standards and excessive borrowing — as the main culprits behind the 2008-09 financial crisis.1 Since then, many questions have emerged regarding the role of credit factors in business-cycle fluctuations. Postwar data for multiple economies suggest that rapid growth in business or household credit and in asset prices are reliable predictors of a financial crisis within the next three years,2 and highlight the key role of corporate debt3 and household debt4 in explaining boom-bust cycles, financial crises and slow macroeconomic recoveries. Using a new statistical model, the 2022 article "Introducing the Credit Market Sentiment Index" — co-authored by several writers of this article (Danilo, Gabriel, Horacio, Francisco and Egon) — estimated a factor summarizing conditions in U.S. credit markets and showed that it is strongly associated with business debt. We refer to this factor as the credit market sentiment index (CMSI).
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Description: Briefing
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Bibliographic Information
Provider: Federal Reserve Bank of Richmond
Part of Series: Richmond Fed Economic Brief
Publication Date: 2025-03-05
Volume: 25
Issue: 09