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Larger crises, slower recoveries: the asymmetric effects of financial frictions

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Abstract

It is well known that movements in lending rates are asymmetric; they rise quickly and sharply, but fall slowly and gradually. Not known is the fact that the asymmetry is stronger the less developed a country's financial system is. This new fact is here documented and explained in a model with an endogenous flow of information about economic conditions. The stronger asymmetry in less developed countries stems from their greater financial system frictions, such as monitoring and bankruptcy costs, which first magnify jumps of lending rates and then delay their recoveries by restricting the generation of information after the crisis. A quantitative exploration of the model shows the data are consistent with this explanation.

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  • Guillermo Ordoñez, 2009. "Larger crises, slower recoveries: the asymmetric effects of financial frictions," Staff Report 429, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:429
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    File URL: http://www.minneapolisfed.org/research/SR/SR429.pdf
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    File URL: http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4239
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    Cited by:

    1. Mäkinen, Taneli & Ohl, Björn, 2015. "Information acquisition and learning from prices over the business cycle," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 585-633.

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    Keywords

    Developing countries; Financial crises;

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