Credit Conditions and Recoveries From Recessions Associated with Financial Crises

Abstract

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Recoveries from recessions associated with a financial crisis tend to be sluggish. In this paper, we present evidence that stressed credit conditions are an important factor constraining the pace of recovery. In particular, using industry-level data, we find that industries relying more on external finance grow more slowly than other industries during recoveries from recessions associated with financial crises. Additional tests, based on establishment size, on alternative definitions of financial crises, and on corporate-government interest rate spreads, support the findings. Moreover, for subsets of industries where financial frictions are more severe, we find much stronger differential growth effects.

The Role of IFRS in Financial Reporting Quality: Evidence from a Panel of MENA Countries

“…banks or corporations (Kannan, 2010). However, the degree and source of causality between asset price changes and future activity is not always clear.…”

Do credit shocks matter? A global perspective

“…5 There is also a rich set of theoretical studies analyzing the implications of various types of financial crises for the real economy (see Gorton, 2009 as regard to the recent financial crisis). 6 See Bernanke, Gertler and Gilchrist, 1996;Kashyap and Stein, 2000;and Kannan, 2010. Our paper attempts to address some of the major gaps in this literature. First, our study is the first one to analyze the global dimensions of credit shocks.…”

Credit conditions and recoveries from financial crises

“…Are these effects unique to banking crises? To answer this question, Kannan (2009) considers an alternative definition of a financial crisis. Instead of relying on the crisis dates of Reinhart and Rogoff (2008) and Laeven and Valencia (2008), which feature primarily banking crises, the paper looks at recessions that featured large drops in equity prices.…”

“…Furthermore, any deterioration in the balance sheets of firms also leads to an increase in the cost of external finance due to agency costs (see Bernanke and Gertler, 1989;and Kiyotaki and Moore, 1997). Kannan (2009) investigates the question of whether or not the stress in credit conditions tends to linger on even after output has started to recover, thus constraining the pace of recovery. Direct measures of credit conditions, however, are difficult to come by.…”

“…Furthermore, as the severity of frictions increases, so should the impact of the dependency on outside finance on growth during recovery. Kannan (2009) reports that credit conditions play an important role in constraining recovery from recessions associated with financial crises. Industries that rely more on outside finance grow more slowly during recoveries from these episodes relative to all other recoveries, suggesting that credit conditions remain stressed well after the trough of the recession.…”