Phoenix Miracles in Emerging Markets: Recovering without Credit from Systemic Financial Crises

Guillermo A. Calvo, Alejandro Izquierdo, Ernesto Talvi

NBER Working Paper No. 12101
Issued in March 2006
NBER Program(s):The International Finance and Macroeconomics Program

Using a sample of emerging markets that are integrated into global bond markets, we analyze the

collapse and recovery phase of output collapses that coincide with systemic sudden stops, defined as periods of skyrocketing aggregate bond spreads and large capital flow reversals. Our findings indicate the presence of a very similar pattern across different episodes: output recovers with virtually no recovery in either domestic or foreign credit, a phenomenon that we call Phoenix Miracle, where output “rises from its ashes”, suggesting that firms go through a process of financial engineering to restore liquidity outside the formal credit markets. Moreover, we show that the US Great Depression could be catalogued as a Phoenix Miracle. However, in contrast to the US Great Depression, EM output collapses occur in a context of accelerating price inflation and falling real wages, casting doubts on price deflation and nominal wage rigidity as key elements in explaining output collapse, and suggesting that financial factors are prominent for understanding these collapses.

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Document Object Identifier (DOI): 10.3386/w12101

Published: Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2006. "Sudden Stops and Phoenix Miracles in Emerging Markets," American Economic Review, American Economic Association, vol. 96(2), pages 405-410, May.

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