Σύνοψη

Credit-less recoveries: the role

of INVESTMENT-SAVINGS IMBALANCES

Hiona Balfoussia

Bank of Greece

Dimitris Malliaropulos

Bank of Greece and University of Piraeus

Abstract

This paper argues that the investment–savings imbalances of households and companies play an important role in determining the probability that an economy experiences a credit-less recovery, following a recession. The investment­–savings gap determines the need for “external” finance of the private sector in the form of either bank credit or capital market financing. Using a broad dataset covering 96 countries and 272 recovery episodes, we provide empirical evidence that credit-less recoveries are indeed associated with both low and declining financing needs of the private sector, as proxied by the investment-savings gap at the trough of the recession and its adjustment during the downturn. We show that this reflects a rebalancing of wealth towards financial assets during the downturn which can subsequently be used to finance real investment during the recovery stage, even in the absence of positive bank credit flows. Lastly, we provide empirical evidence that, controlling for the change in investment-savings imbalances, economies whose economic downturn was preceded by a credit boom are more likely to experience a credit-less recovery.

JEL classification: E22, E32, E44, G01

Keywords: Credit-less recovery, crisis, savings-investment imbalance, financing needs, flow of funds

Acknowledgments: We are most grateful to N. Sugawara and J. Zalduendo for making their dataset available for use in the present research. We would also like to thank Heather Gibson and the participants of a Bank of Greece seminar for their useful comments. The views expressed in this paper are those of the authors and not necessarily those of either the Bank of Greece or the Eurosystem.

Correspondence:

Dimitris Malliaropulos

Economic Analysis and Research Department,

Bank of Greece,

21 El. Venizelos Av.,

10250 Athens, Greece

Tel.:0030-210-3202380

Fax: 0030-210-3203939