How Do Credit Conditions Shape Economic Recoveries?

27 Pages Posted: 18 Apr 2011

See all articles by Fabrizio Coricelli

Fabrizio Coricelli

University of Siena - Department of Political and International Sciences ; Paris School of Economics (PSE); Centre for Economic Policy Research (CEPR)

Isabelle Roland

London School of Economics & Political Science (LSE)

Date Written: April 2011

Abstract

This paper investigates the role of credit in shaping economic recoveries and tries to shed some light on the phenomenon of creditless recoveries using industry-level data for a large sample of countries. We find that while a failure of the credit stock to recover to its pre-crisis level does not hamper growth, a failure of credit flows to recover slows down economic recovery. Next, we find that industries that are more dependent on external finance recover more quickly in countries with better financial development during creditless recoveries as defined by Calvo et al. (2006a). This indicates that certain mechanisms enable the economy to grow despite the creditless character of recovery. These mechanisms may include the availability of alternative sources of financing such as trade credit, the re-allocation to less credit dependent sectors, or the take-up of unutilized capacity. Finally, we find evidence that industries that are more dependent on trade credit as opposed to bank credit recover more quickly because they are less vulnerable to prolonged credit market disruptions. This 'substitution effect' is stronger during creditless recoveries, giving support to the view that creditless recoveries are a response to protracted disruptions in official credit markets.

Keywords: creditless recoveries, financial crises, trade credit

JEL Classification: F30, G01, O40

Suggested Citation

Coricelli, Fabrizio and Roland, Isabelle, How Do Credit Conditions Shape Economic Recoveries? (April 2011). CEPR Discussion Paper No. DP8325, Available at SSRN: https://ssrn.com/abstract=1810290

Fabrizio Coricelli (Contact Author)

University of Siena - Department of Political and International Sciences ( email )

Via Mattioli, 10
Siena, 53100
Italy

Paris School of Economics (PSE)

48 Boulevard Jourdan
Paris, 75014 75014
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Isabelle Roland

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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