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Credit and recessions

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Abstract

The paper develops a simple model on the asymmetric role of credit markets in output fluctuations. When credit markets are underdeveloped and enterprise activity is financed by trade credit, shocks may induce a break-up of credit and production chains, leading to sudden and sharp contractions. The development of a banking sector can reduce the probability of such collapses and hence plays a crucial role in softening output declines. However, the banking sector becomes a shock amplifier when shocks originate in the financial sector. Using industry-level data across a large cross-section of countries, we provide evidence in support of the model's predictions

Suggested Citation

  • Fabrizio Coricelli & Isabelle Roland, 2010. "Credit and recessions," Documents de travail du Centre d'Economie de la Sorbonne 10022, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    • Handle: RePEc:mse:cesdoc:10022
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    Cited by:

    1. Fabrizio Coricelli & Marco Frigerio, 2015. "The Credit-Output Relationship During the Recovery from Recession," Open Economies Review, Springer, vol. 26(3), pages 551-579, July.

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    More about this item

    Keywords

    Credit chains; trade credit; recessions; financial development;
    All these keywords.

    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • F30 - International Economics - - International Finance - - - General
    • G01 - Financial Economics - - General - - - Financial Crises

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