Can Europe recover without credit?

Darvas, Zsolt (2014) Can Europe recover without credit? Working Paper. Corvinus University of Budapest Faculty of Economics, Budapest.

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This article was first published in Society and Economy, 2014. vol. 36. no. 2. p. 129-149.


Data from 135 countries covering five decades suggests that creditless recoveries, in which the stock of real credit does not return to the pre-crisis level for three years after the GDP trough, are not rare and are characterised by remarkable real GDP growth rates: 4.7 percent per year in middle-income countries and 3.2 percent per year in high-income countries. However, the implications of these historical episodes for the current European situation are limited, for two main reasons. First, creditless recoveries are much less common in high-income countries, than in low-income countries which are financially undeveloped. European economies heavily depend on bank loans and research suggests that loan supply played a major role in the recent weak credit performance of Europe. There are reasons to believe that, despite various efforts, normal lending has not yet been restored. Limited loan supply could be disruptive for the European economic recovery and there has been only a minor substitution of bank loans with debt securities. Second, creditless recoveries were associated with significant real exchange rate depreciation, which has hardly occurred so far in most of Europe. This stylised fact suggests that it might be difficult to re-establish economic growth in the absence of sizeable real exchange rate depreciation, if credit growth does not return.

Item Type:Monograph (Working Paper)
Series Name:Corvinus Economics Working Papers - CEWP
Series Number / Identification Number:2014/05
Uncontrolled Keywords:creditless recovery, credit growth financial structure, real exchange rate adjustment
JEL classification:E32 - Business Fluctuations; Cycles
E44 - Financial Markets and the Macroeconomy
E51 - Money Supply; Credit; Money Multipliers
F31 - Foreign Exchange
G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Divisions:Faculty of Economics > Department of Mathematical Economics and Economic Analyses
Subjects:Economic policy
ID Code:1605
Deposited By: Ádám Hoffmann
Deposited On:19 Jun 2014 11:32
Last Modified:25 Jul 2014 11:59

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