Credit and Economic Recovery: Demystifying Phoenix Miracles

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.