Slow(er) boom, sudden crash: Asymmetry on lending rates and financial frictions
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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|Date of creation:||03 Dec 2006|
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