Macroeconomic Activity and Risk Indicators: An Unstable Relationship

We assess to what extent indicators of financial conditions can be considered relevant determinants and predictors of macroeconomic aggregates. The main finding is that controlling for default risk and risk aversion measures improves the forecasts of output, employment and loans, but that this improvement is largely attributable to the recession periods of 2001 and 2008. A structural VAR analysis further reveals that financial condition indicators display significant real effects only after the Great Financial Crisis. In particular, an unexpected increase in the credit spread in 2010 causes an output contraction that lasts for about two years, with an annualised through of 4.8%, and explains up to 35% of the forecast error variance of industrial production.