Phoenix Miracles in Emerging Markets: Recovering Without Credit from Systemic Financial Crises, Issue 12101
National Bureau of Economic Research, 2006 - Depressions - 35 pages
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.
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recovering without credit from
A Partial Equilibrium Model
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Argentina Asia Asian average bank credit behaviour Borderline Brazil capital ﬂows capital market capital stock Chile Cobb-Douglas credit crunch credit-less crises crisis episodes cumulative contractions current account balance Deep Crisis deﬁne Depression domestic Ecuador EMBI emerging market Emerging Market Bond emerging market economies factors fall Figure ﬁnancial ﬁnancing ﬁrms ﬁrst full recovery points Fund GDP Index global gross revenue increase inﬂation Inter-American Development Bank interest rate inventories inventory/capital ratio investment Korea linear homogeneity liquidity crisis measured TFP mild recessions nominal exchange rate output collapse output contraction output recovery Panel partial equilibrium peak to trough percent from pre-crisis percent level Phoenix Miracle physical capital post-collapse recovery pre-crisis levels pre-crisis peak price deﬂation private sector real wages recovery phase reﬂect sample SDRM share of GDP shocks signiﬁcant stylised facts sudden stops Talvi throughout the collapse-recovery Trough to recovery Uruguay Venezuela vulnerabilities