Working Paper: NBER ID: w12101
Authors: Guillermo A. Calvo; Alejandro Izquierdo; Ernesto Talvi
Abstract: Using a sample of emerging markets that are integrated into global bond markets, we analyze the\ncollapse 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: No keywords provided
JEL Codes: F31; F32; F34; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absence of credit recovery (G33) | output recovery (C67) |
| sudden stops (F32) | output collapse (E23) |
| output collapse (E23) | total factor productivity (TFP) behavior (D24) |
| output recovery (C67) | total factor productivity (TFP) behavior (D24) |
| liability dollarization (F65) | rise in real debt value (H63) |
| financial constraints (H60) | rise in real debt value (H63) |