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

45 Pages Posted: 20 Sep 2007

See all articles by Guillermo A. Calvo

Guillermo A. Calvo

Columbia University - School of International & Public Affairs (SIPA); National Bureau of Economic Research (NBER)

Alejandro Izquierdo

Inter-American Development Bank (IDB) - Research Department

Ernesto Talvi

Centro de Estudios de la Realidad Economica y Social (CERES)

Multiple version iconThere are 3 versions of this paper

Date Written: December 2006

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, Great Depression, Balance of Payments crisis, Sudden Stop, capital flows, Phoenix Miracle, credit crunch

JEL Classification: F31, F32, F34, F41

Suggested Citation

Calvo, Guillermo A. and Izquierdo, Alejandro and Talvi, Ernesto, Phoenix Miracles in Emerging Markets: Recovering without Credit from Systemic Financial Crises (December 2006). BIS Working Paper No. 221. Available at SSRN: https://ssrn.com/abstract=1012286 or http://dx.doi.org/10.2139/ssrn.1012286

Guillermo A. Calvo (Contact Author)

Columbia University - School of International & Public Affairs (SIPA) ( email )

420 West 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Alejandro Izquierdo

Inter-American Development Bank (IDB) - Research Department ( email )

1300 New York Ave., NW
Washington, DC 20577
United States

Ernesto Talvi

Centro de Estudios de la Realidad Economica y Social (CERES) ( email )

Antonio Costa 3476
11300 Montevideo
Uruguay
(5982)628-7703 / 628 76 44 (Phone)
(5982)622-0526 (Fax)

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