Larger Crises, Slower Recoveries: The Asymmetric Effects of Financial Frictions

Lending rates are more likely to experience big jumps rather than big drops. I compare this asymmetry across countries. First, I document that lending rates are more asymmetric in economies with poor financial systems. Second, I explain this finding by introducing agency costs into a model with endogenous flow of information about the aggregate state of the economy. High monitoring costs magnify the size of crises and restrict the generation of information that fuels recoveries. Finally, by calibrating the model, I show that cross-country differences in the asymmetry of lending rate fluctuations are well explained by differences in these financial frictions.