The magnitude and Cyclical Behavior of Financial Market Frictions



Figure 3

Changes in Volatility of Idiosyncratic Risk

Default Productivity Threshold

Probability of Default


Leverage (logarithmic scale)


Leverage (logarithmic scale)


External Finance Premium


Credit Spread


Percentage Points


Percentage Points


Note. Bankruptcy cost parameter (μ) is set equal to 0.12. The external finance premium and the credit
spread are measured relative to a risk-free rate of 3 percent.

11



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