Do credit markets respond to macroeconomic shocks? The case for reverse causality

The response of corporate bond credit spreads to three exogenous macro-shocks -- oil supply, investment-specific technology, and government spending -- is large, significant, and a mirror image of macroeconomic activity. This counter-cyclicality is largely driven by credit risk premia and translates into significant return predictability. Equity risk premia exhibit similar responses, providing external validity. Information rigidities and leverage play a key role in the transmission of the shocks. Since causal evidence linking macro-shocks to credit markets is scarce and recent work highlights the real effects of credit fluctuations, our findings contribute to understanding the joint dynamics of credit markets and the macroeconomy.