The Credit-Output Relationship During the Recovery from Recession

The Great Recession has generated renewed interest in the phenomenon of creditless recoveries. This paper studies the mechanisms behind such phenomenon, analyzing data on industries for a large set of countries over a forty year period from 1963 to 2003. We find that during creditless recoveries there is a significant reallocation of resources away from sectors that are more dependent on bank credit, both for their investments and for their short-term liquidity needs. The adverse effects of credit constraints are softened in sectors that rely more on alternative sources of financing, such as trade credit, or in sectors that have more favorable access to credit because of higher collateral. We thus conclude that creditless recoveries do not simply reflect a natural process of deleveraging, but they may imply significant inefficiencies in the allocation of resources.