Credit and Economic Recovery: Demystifying Phoenix Miracles∗
Michael Biggs Thomas Mayer March 15, 2010 Andreas Pick

Abstract This paper offers a solution to the puzzle that economic activity recovers after a financial crisis without a rebound in credit. These credit-less recoveries, known as “Phoenix Miracles”, question the importance of credit. We argue that these recoveries appear credit-less because GDP is compared to the stock of credit. We show in a theoretical model that recoveries in GDP coincide with recoveries in the flow of credit and this can occur even as the stock of credit declines. Data from emerging and developed economies confirm this finding. JEL Classification Numbers: F30, G01 Keywords: Credit, economic recovery, financial crises

∗

We would like to thank Markus Brunnermeier, Menzie Chinn, Michael Dooley, Gabriele

Galati, Daniel Gros, Dwight Jaffee, Rudy Loo-Kung, Pierre Lafourcade, Agnieszka Markiewicz, Christopher Morris, Holger Strulik, Peter Tinsley, Harald Uhlig, Joris de Wind, and seminar participants at DNB and UC Davis for helpful comments. We are grateful to Guillermo Calvo for sharing his data with us. The views expressed are the authors’ and do not necessarily reflect those of Deutsche Bank.

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Electronic copy available at: http://ssrn.com/abstract=1595980

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Introduction

It has become almost a stylized fact that after financial crises, economic activity recovers without a rebound in credit (see for example International Monetary Fund (2009)). This phenomenon, termed a “credit-less recovery” or “Phoenix Miracle”, was first highlighted by Calvo, Izquierdo and Talvi (2006a, 2006b) in the context of emerging market economies, but is also a feature of business cycles in industrial countries (Claessens, Kose and Terrones 2008). Perhaps the most striking example of this is the U.S. experience after the Great Depression. A