| 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 |