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# **I. Introduction**

Private sector credit plays a crucial role in helping a country to recover from an economic recession. For instance, credit provided by commercial banks can re-energize the investment expenditure of enterprises and is an important option in handling household finances. While a recovery without private sector credit is possible, the empirical evidence suggests that such recoveries occur at a much slower pace. Indeed, a credit-less recovery, defined as a recovery from recession without a pick-up in real bank credit to the private sector, is not an unusual event but has been observed both among advanced and emerging economies.<sup>1</sup> Even with different samples, the literature tends to find that the share of credit-less recoveries is around 20 to 25 percent of all recoveries.

But, if a recovery without bank credit is such a commonly-observed event, what drives a country to experience a credit-less recovery? This is the focus of this paper; namely, what factors, including macroeconomic policy stances, make more likely a credit-less (or a credit-with) event following a recession. Understanding the determinants of such events sheds light on the challenges faced after a recession. For instance, it allows us to examine the difficulties faced by countries in Europe and Central Asia (referred here as ECA countries); that is, the likelihood of a credit-less or credit-with recovery pattern following the crisis in 2008–09.

In order to examine the issues mentioned above, this paper uses quarterly data series to identify credit-less recoveries. The analysis based on quarterly data has several advantages here. First, it can specify economic troughs and the subsequent recoveries more precisely. Unlike annual series, in which within-year differences are ignored, quarterly data can capture, say, specifically in which quarter of a given year an output collapse is observed. Secondly, with quarterly data series, the paper can cover the 2008–09 global financial crisis. As explained in the section below, in order to identify the trough-recovery patterns, several observations at the beginning and end of time-series data need to be excluded. This data omission can have more impact in the analysis with the annual series. More recent data points can be kept in the data set by using the quarterly data.

This paper contributes to the existing literature with the following findings. It first confirms that a credit-less recovery is not rare—more than 25 percent of all recoveries are credit-less—but also shows that global financial crisis is an unusual event (i.e., around 45 percent of all credit-less recoveries are concentrated in 2009 and 2010). This paper then examines the differences in output and investment growth between credit-less and credit-with episodes and finds that growth is lower in the former episodes but the gap between these two tends to disappear by two years since the trough. The regression analysis emphasizes the importance of output downturn and external adjustment as determinants of credit-less recoveries. It also finds that fiscal and monetary easing, respectively, increases and decreases the probability of credit-less recoveries and the availability of the program supported by the International Monetary Fund (IMF) also reduces the likelihood of credit-less events.

The rest of the paper is structured as follows. The next section briefly reviews the existing literature on the relationship between private sector credit and economic recoveries. Section III 1 Conversely, a credit-with recovery indicates a recovery from recession with an increase in the private sector credit.