Corporate Bond Spreads as a Predictor of Euro Area GDP: Testing the Financial Accelerator at the Sector Level

Abstract: We study the predictive power of corporate bond spreads over real economic activity within the framework of the financial accelerator theory. Previous research has confirmed this relationship but there is a gap in the literature concerning classifications of corporate bonds other than credit rating and bond maturity. To fill the gap, our purpose is to test whether the financial accelerator can be detected at a sector level and if some sectors contain more predictive power than others. We conduct an in-sample regression analysis and an out-of-sample forecast using data from the euro area. Our main results confirm that corporate bond spreads hold predictive power over real GDP growth on a sector level, verifying the financial accelerator, but the relationship is highly dependent on the time horizon one wants to foresee.