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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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    Cited by:

    1. Ambrocio, Gene, 2017. "The real effects of overconfidence and fundamental uncertainty shocks," Research Discussion Papers 37, Bank of Finland.
    2. Geert Bekaert & Alexander Popov, 2012. "On the Link Between the Volatility and Skewness of Growth," NBER Working Papers 18556, National Bureau of Economic Research, Inc.
    3. Ambrocio, Gene, 2017. "The real effects of overconfidence and fundamental uncertainty shocks," Research Discussion Papers 37/2017, Bank of Finland.
    4. Wamboye, Evelyn & Mookerjee, Rajen, 2013. "Financial development and manufactured exports: the african experience," MPRA Paper 46474, University Library of Munich, Germany.
    5. Ferrari, Massimo, 2014. "The financial meltdown: a model with endogenous default probability," MPRA Paper 59419, University Library of Munich, Germany.

    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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