Larger crises, slower recoveries: the asymmetric effects of financial frictions
AbstractIt 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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Bibliographic InfoPaper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 429.
Date of creation: 2009
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-08-02 (All new papers)
- NEP-CBA-2009-08-02 (Central Banking)
- NEP-FDG-2009-08-02 (Financial Development & Growth)
- NEP-MAC-2009-08-02 (Macroeconomics)
- NEP-MON-2009-08-02 (Monetary Economics)
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- Taneli MÃ¤kinen & BjÃ¶rn Ohl, 2014.
"Information acquisition and learning from prices over the business cycle,"
Temi di discussione (Economic working papers)
946, Bank of Italy, Economic Research and International Relations Area.
- Mäkinen, Taneli & Ohl, Björn, 2012. "Information Acquisition and Learning from Prices Over the Business Cycle," Working Paper Series in Economics and Finance 740, Stockholm School of Economics, revised 11 Nov 2012.
- Mäkinen, Taneli & Ohl , Björn, 2014. "Information acquisition and learning from prices over the business cycle," Research Discussion Papers 7/2014, Bank of Finland.
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