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

Author

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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

Suggested Citation

  • Guillermo Ordonez, 2006. "Slow(er) boom, sudden crash: Asymmetry on lending rates and financial frictions," 2006 Meeting Papers 529, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:529
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    More about this item

    Keywords

    Asymmetry; lending rates; information dynamics; financial frictions;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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