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The Magnitude and Cyclical Behavior of Financial Market Frictions

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  • Andrew T. Levin
  • Fabio M. Natalucci

Abstract

We analyze a new panel data set that includes balance sheet information, measures of expected default risk, and credit spreads on publicly-traded debt for more than 900 firms over the period 1997Q1 through 2003Q3. We obtain precise time-specific estimates of the financial frictions parameter underlying the benchmark financial accelerator model of Bernanke, Gertler, and Gilchrist (1999) and clearly reject the null hypothesis of no credit market imperfections; furthermore, for the expansionary period through mid-2000, these estimates are quite similar to the calibrated values used in previous research. Finally, we find that financial market frictions exhibit strong cyclical pattern, with parameter estimates rising by a factor of two during the latest economic downturn before returning to pre-recession levels in 2003.
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Suggested Citation

  • Andrew T. Levin & Fabio M. Natalucci, 2005. "The Magnitude and Cyclical Behavior of Financial Market Frictions," 2005 Meeting Papers 443, Society for Economic Dynamics.
  • Handle: RePEc:red:sed005:443
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    Keywords

    external finance premium; bankruptcy costs; financial accelerator;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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