The magnitude and Cyclical Behavior of Financial Market Frictions

Figure 2

Changes in Bankruptcy Costs

Default Productivity Threshold

Probability of Default

External Finance Premium

Credit Spread

Percentage Points

Percentage Points

Note. Standard deviation of the idiosyncratic productivity shock (σ ) is set equal to 0.28. The external
finance premium and the credit spread are measured relative to a risk-free rate of 3 percent.

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