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The magnitude and Cyclical Behavior of Financial Market Frictions

Listed author(s):
  • (Kim | Lopez-Salido | Swanson)
  • Andrew Levin

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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File URL: http://repec.org/sce2004/up.1465.1077906175.pdf
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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 224.

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Date of creation: 11 Aug 2004
Handle: RePEc:sce:scecf4:224
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