The article explores how debt levels can impact the economy during different phases of the business cycle. When firms borrow money, the risk of default acts like a tax on their future investments, discouraging them from taking risks. This effect is stronger during economic downturns, amplifying the impact of shocks to productivity, government spending, and funding costs. The study shows that this distortion can have significant and lasting effects on various economic variables, such as default rates and credit spreads.