Output collapse in Eastern Europe: The role of credit

Real bank credit in Eastern European countries after their recent stabilization programs is shown to have fallen sharply, except in the case of Hungary. The meaning of the fall is discussed from the present value and liquidity perspectives. Moreover, it is shown that the hypothesis that the output contraction may partly owe to a credit contraction cannot be ruled out. The hypothesis is tested on a sample of 85 branches of industry in Poland. Also analyzed are the rationale for expecting a connection between credit and output and the policy options available to mitigate the liquidity crunch in postsocialist economies.