Moreover, in simple forecasting regressions, changes in the EBP are associated with significant movements in GDP and unemployment one year later. In other words, an increase in the EBP – that is, a widening of the non-default-related component of credit spreads – portends a decline in economic activity and employment a year later.
The specifications of GZ are linear, so they impose the assumption that increases in the EBP have an effect that is symmetric to decreases. In table 1 and figure 2, I look explicitly for asymmetries, with a specification that allows an upward move in the EBP to have a different effect on the economy than a downward move.