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Slow(er) boom, sudden crash: Asymmetry on lending rates and financial frictions

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  • Guillermo Ordonez

    ()
    (Economics UCLA)

Abstract

Asset markets are characterized by slow booms and sudden crashes. Lending rates, for example, are more likely to experience big jumps rather than big drops. We focus on the comparison of this pattern across countries. First, we document that lending rates are more asymmetric on economies with poor financial systems. Second, we explain this finding by introducing financial frictions into a model with endogenous flow of information. High agency costs restrict the generation of information that fuels booms. Contrarily, they are not so important in good times, being irrelevant on determining the magnitude or speed of crashes. Finally, by calibrating the model, we show that cross-country differences of asymmetry in lending rates fluctuations are well explained by differences on monitoring costs

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 529.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:529

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Keywords: Asymmetry; lending rates; information dynamics; financial frictions;

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