two percentage point slowing of gdp growth over the next four quarters and slightly more than a one percentage point increase in the unemployment rate over the same interval. 20 these effects are, by any standard, economically important. by contrast, declines in the ebp have no discernible effect at all on economic activity. example, movements in short - term rates in the wake of an announcement by the federal open market committee. a similar identification strategy is not available for linking monetary policy changes to movements in, say, nonfinancial - sector leverage, given that the latter is measured infrequently. see gilchrist and zakrajsek ( 2012 ). to be a bit more precise, in the 40 - year sample period, there are seven observations in which the ebp increases by more than 50 basis points in a single quarter. bis central bankers ’ speeches putting it all together, this reasoning suggests that the credit risk premium – as measured, say, by a forecasting model like that of greenwood and hanson – may be an operationally useful measure of financial market vulnerability. when this risk premium is low, there is a greater probability of a subsequent upward spike in credit spreads and the ebp. moreover, such upward spikes, when they do occur, are associated with significant adverse economic effects. to be clear, we are not necessarily talking about once - in - a - generation financial crises here, with major financial institutions teetering on the brink of failure. nevertheless, the evidence suggests that even more modest capital market disruptions may have consequences that are large enough to warrant consideration when formulating monetary policy. if so, the indicated directional adjustment would be to be less aggressive in providing monetary accommodation in the face of above - target unemployment, all else being equal, when risk premiums are abnormally low. of course, there are many caveats. foremost among them is the fact that the ability of increases in the ebp to predict future economic activity may not reflect a causal link from the former to the latter. perhaps there are economic slowdowns that are caused entirely by nonfinancial factors, and, when investors see one on the horizon, they get skittish, causing the ebp to rise. if so, it would be wrong to conclude that easy monetary policy – even if it does, in fact, cause lower risk premiums – has any causal effect on the probability of a future slowdown. so at this point, the evidence that

, greenwood and hanson show that the returns on junk bonds relative to treasury securities over two - to three - year horizons can also be forecast with rsquared values in the ballpark of 30 to 40 percent, in this case by using two intuitively appealing forecasting variables : credit spreads and the high - yield share, which is the fraction of total bond issuance that comes from the high - yield category. 15 figure 1 illustrates the timeseries variation in estimates of both of these risk premiums. again, these sorts of findings are largely undisputed. where there is more controversy is over the interpretation of these patterns, with some arguing that they reflect waves of irrational investor sentiment and others taking the view that they come from more rational factors, such as time variation in either the risks facing investors or their tolerance for bearing such risks. here is where one can get into hard - to - resolve debates about bubble spotting and about whether one can expect the federal reserve to be smarter than other market participants. however, at least for some purposes, these debates are beside the point. in particular, the implications for monetary policy that i have in mind do not seem to depend critically on the difficult question of why there is so much time variation in expected bond market returns ; they only require that this variation exists, as we know it does. in other words, there may be scope to make considerable practical progress while remaining largely agnostic about the whole metaphysical are - there - bubbles question. 16 okay. so let ’ s stipulate that risk premiums in the bond market move around a lot. the next observation to throw into the mix is that monetary policy is one of the factors that have an important influence on these movements. an emerging body of empirical work finds that an easing of monetary policy – even via conventional policy tools in normal times – tends to reduce both the term premiums on long - term treasury securities and the credit spreads on corporate bonds. 17 that is, monetary policy always tends to work in part through its effect on capital market risk premiums, perhaps through a risk - taking or reaching - for - yield mechanism. 18 see cochrane ( 2011 ) for a recent survey of what is by now an enormous literature. see cochrane and piazzesi ( 2005 ). see greenwood and hanson ( 2013 ). this statement admittedly sweeps some important subtleties under the rug. more precisely, i suspect that, if one takes the federal reserve's legal mandate as given – and, more specifically