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Anatomy of credit-less recoveries

Luis Corrado and Isolina Rossi ()

No 8465, Policy Research Working Paper Series from The World Bank

Abstract: The recovery from the global crisis that erupted in 2007 shows that the decoupling between real and financial variables during the business cycle can lead to negative and long-lasting consequences for the economy. A key feature of the past global crisis in many countries is that the recovery in aggregate output has not been accompanied by a contemporary pick-up in lending flows to the private sector, rendering the recovery credit-less. This paper uses data on output and credit to study the relative roles of demand and supply drivers of credit growth during economic recoveries on a sample of advanced and emerging countries between 1980 and 2014. Using a simple endowment economy model, the paper shows that credit-less recoveries are correlated with liquidity shocks in real and financial markets and with the pace of private sector deleveraging. The empirical analysis shows that during these episodes demand-side frictions played a relatively larger role in predicting the occurrence of the episodes, reflecting weak demand for liquidity by the private sector in the aftermath of the crisis.

Keywords: Financial Regulation&Supervision; International Trade and Trade Rules; Quality of Life&Leisure; Youth and Governance; Social Analysis; National Governance; Government Policies; Financial Sector Policy; Economic Growth (search for similar items in EconPapers)
Date: 2018-06-05
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