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The Asymmetric Effects of Financial Frictions

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  • Guillermo Ordoñez

Abstract

Economic variables are known to move asymmetrically over the business cycle: quickly and sharply during crises, but slowly and gradually during recoveries. Not known is the fact that this asymmetry is stronger in countries with less-developed financial systems. This new fact is documented using cross-country data on loan interest rates, investment, and output. The fact is then explained using a learning model with endogenous flows of information about economic conditions. Asymmetry is shown to be stronger in less-developed countries because these countries have greater financial frictions, which are captured in the model by higher monitoring and bankruptcy costs. These greater frictions magnify the crisis reactions of lending rates and economic activity to shocks and then delay their recovery by restricting the generation of information after the crisis. Empirical evidence and a quantitative exploration of the model show that this explanation is consistent with the data.

Suggested Citation

  • Guillermo Ordoñez, 2012. "The Asymmetric Effects of Financial Frictions," NBER Working Papers 18360, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18360
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    3. Ambrocio, Gene, 2017. "The real effects of overconfidence and fundamental uncertainty shocks," Research Discussion Papers 37/2017, Bank of Finland.
    4. Nicholas Bloom & Fatih Guvenen & Sergio Salgado, 2016. "Skewed Business Cycles," 2016 Meeting Papers 1621, Society for Economic Dynamics.
    5. Dong, Feng & Xu, Zhiwei, 2020. "Cycles of credit expansion and misallocation: The Good, the Bad and the Ugly," Journal of Economic Theory, Elsevier, vol. 186(C).
    6. Geert Bekaert & Alexander Popov, 2019. "On the Link Between the Volatility and Skewness of Growth," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(4), pages 746-790, December.
    7. Gigout, Timothee, 2019. "Firm dynamics in an global and uncertain economy," MPRA Paper 96569, University Library of Munich, Germany, revised 16 Oct 2019.
    8. Jianxing Wei & Tong Xu, 2018. "A Model of Bank Credit Cycles," 2018 Meeting Papers 610, Society for Economic Dynamics.
    9. Bo Becker & Marieke Bos & Kasper Roszbach, 2020. "Bad Times, Good Credit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(S1), pages 107-142, October.
    10. Evelyn Wamboye & Rajen Mookerjee, 2014. "Financial development and manufactured exports: the African experience," International Journal of Economic Policy in Emerging Economies, Inderscience Enterprises Ltd, vol. 7(1), pages 22-34.
    11. Vladimir Asriyan & Luc Laeven & Alberto Martín, 2018. "Collateral Booms and Information Depletion," Working Papers 1064, Barcelona Graduate School of Economics.
    12. Gene Ambrocio, 2020. "Rational exuberance booms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 263-282, January.
    13. Stefano Giglio & Ian Dew-Becker & David Berger, 2016. "Contractionary Volatility or Volatile Contractions?," 2016 Meeting Papers 673, Society for Economic Dynamics.
    14. Ranjan Kumar Mohanty & N R Bhanumurthy, 2020. "Asymmetric Monetary Policy Transmission in India:Does Financial Friction Matter?," BASE University Working Papers 03/2020, BASE University, Bengaluru, India.
    15. Ferrari, Massimo, 2014. "The financial meltdown: a model with endogenous default probability," MPRA Paper 59419, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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