- Economic growth and forward-looking indicators of default risk inferred from equity markets, two variables that together predict business bankruptcies in advanced economies, show bankruptcies rising significantly by the end of 2021.
- Projections of real GDP growth embedded in the consensus forecast account for the bulk of this projected increase. Unlike in previous downturns, the stock market-based default indicators contribute very little.
- As these findings underscore, the pandemic and unprecedented government support for the business sector have driven a sizeable wedge between financial market perceptions of default risk and projections for economic activity.
Ryan Niladri Banerjee, Giulio Cornelli, Egon Zakrajšek