recovery takes place in 15 years or more without any rebound in domestic credit.<sup>1</sup> Credit-less recoveries are also a central feature of business cycles in advanced countries (Abiad et al. 2011; Claessens et al. 2009) and tend to follow recessions accompanied by financial sector stress, including boom-busts in credit markets. Analyzing the financial cycles of a sample of advanced economies, Claessens et al. (2008) show that recessions associated with strong credit contractions and house prices busts tend to be more severe and last longer. More often than not, following these episodes a recovery of the real economy occurs ahead of improvements in financial conditions. Similarly, Abiad et al. (2011) show that when credit-less recoveries are preceded by systemic banking crises, their frequency is more than three times higher. If a credit boom and a banking crisis precede the recovery, the relative frequency of such episodes in the sample of countries under analysis increases to 77 percent.

Other macroeconomic indicators positively correlated with the probability of credit-less recovery are the size of output contractions and the extent of external adjustment during the recession phase of the cycle (Sugawara and Zalduendo, 2013 and Bijsterbosch and Dahlhaus, 2011). During creditless episodes sectors more dependent on external finance tend to grow disproportionately less then during normal recoveries (Abiad et al. 2011) and resources tend to depart from sectors which are more (bank) credit dependent (Coricelli and Frigerio, 2015).

Our work differs significantly from current studies. While existing literature predominantly focuses on the macroeconomic conditions preceding credit-less recoveries, our analysis focuses on the study of demand and supply dynamics underlying credit patterns during crisis episodes, using priceoutput correlations to disentangle the relative contributions of distinct (demand and supply) frictions during the recession phase. In particular, the work contributes to the above mentioned literature in several ways. First, it is among the first works to provide a comprehensive theoretical framework to analyze credit-less recoveries, which places major emphasis on the role of demand and supply side frictions in credit markets to explain liquidity dynamics during the recovery phase of the cycle. Second, it employs a novel panel database of crisis episodes between 1980 and 2014 - including data covering the global financial crisis - to examine the relative contributions of demand and supply drivers of credit growth. By analyzing distinct drivers of output recovery, our work shows that subdued lending activity in the aftermath of recessionary episodes, reflects (on average) weak demand for liquidity by the private sector. These results suggest that when constraints to credit growth are mainly demand-driven, policy interventions aimed at stimulating aggregate demand making full usage of the fiscal and monetary levers should be prioritized.

The remainder of the paper is organized as follows. Section 2 presents the model and the testable

> 1The role of cross-country hetereogenity during credit-less recoveries has also been documented by Ayyagari, Demirgüç-Kunt and Maksimovic (2011).

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