Phoenix miracles in emerging markets: recovering without credit from systemic financial crises

Alejandro Izquierdo, Ernesto Talvi and Guillermo Calvo

No 221, BIS Working Papers from Bank for International Settlements

Abstract: Using a sample of emerging markets that are integrated into global bond markets, we analyse 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.

Keywords: Output collapse; systemic crises; Balance of Payments crisis; Sudden Stop; capital flows; Phoenix Miracle; credit crunch; Great Depression (search for similar items in EconPapers)
JEL-codes: F31 F32 F34 F41 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2006-12
New Economics Papers: this item is included in nep-cba, nep-fdg and nep-his
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (203)

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Related works:
Working Paper: Phoenix Miracles in Emerging Markets: Recovering without Credit from Systemic Financial Crises (2006)
Working Paper: Phoenix Miracles in Emerging Markets: Recovering without Credit from Systemic Financial Crises (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:221

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