The Bank of England published Staff Working Paper No. 1,157 examining how corporate bond financing conditions affect economic activity in the United Kingdom in aggregate and across firms. Using a UK measure of the excess bond premium (EBP) as a proxy for market-based credit conditions, the authors find it outperforms traditional business-cycle indicators in forecasting macroeconomic outcomes and provides evidence consistent with a financial accelerator mechanism. At the aggregate level, a one-standard-deviation increase in the EBP (53 basis points) is estimated to lower gross fixed capital formation by almost 4 percentage points after around 1.5 years and to reduce GDP by up to 2 percentage points, while unemployment rises by up to 0.5 percentage points. The investment response is strongest for capital-intensive assets and industries, with machinery and equipment and manufacturing and other production investment falling by as much as 6 and 10 percentage points, while public-sector gross fixed capital formation moves countercyclically. At the firm level, investment is more sensitive to EBP shocks for highly leveraged and more bond-reliant firms, with capital expenditure for above-median leverage and bond-share firms falling by as much as 9 percentage points, while sales and profits decline on average with less heterogeneity. The paper is part of the Bank’s staff working paper series and is published to elicit comments and debate, with the views attributed to the authors rather than Bank of England policy.

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