Bond Defaults Are Typically Symptoms, Not Causes, of Macro Distress

Disruptions in the financial sector can have significant implications on the real economy, as seen in 2008–2009. However, financial stress can also reflect macroeconomic factors, such as recessions. This article examines the role of the bond market and credit defaults relative to other macroeconomic and financial factors, across a long run of US data and across countries. While there are commonalities between macro and credit cycles, they do not always move in sync with one another. Results from different econometric approaches find no evidence that high bond default rates have systematically had a negative impact on growth, beyond what is already apparent in other macro data. This does not mean that bond market developments have no effect in individual credit cycles, just that there is no evidence of a consistent effect across different cycles. From a policy perspective, this suggests that bond market downturns are unlikely to present consistent risks to financial stability or the broader macroeconomy.