Credit prices vs. credit quantities as predictors of economic activity in Europe: Which tell a better story?

This paper examines the role of external credit providers in the EMU and assesses the effects of credit spreads and credit quantities on economic activity. Movements in credit spreads are far more successful than movements in the external finance mix in predicting near-term changes in real economic activity in ten EMU countries. However, the forecasting performance of the three credit spreads evaluated in this paper is uneven. A risk premium extracted from individual corporate bond yields predicts economic activity fairly well in Germany and Southern Europe. Two other credit spreads, the 'spread' and the 'ECB-spread', have predictive power for some measures of economic activity but they fail to predict consistently across either a range of economic indicators or countries.