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A Dual Liquidity Model for Emerging Markets

Author

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  • Ricardo J. Caballero
  • Arvind Krishnamurthy

Abstract

The last few years have seen a significant re-evaluation of the models used to analyze crises in emerging markets. Recent models typically stress financial constraints or distorted financial incentives. While this certainly represents progress, these models share a weakness with the earlier work: neither is uniquely about emerging markets. Adaptations of the Mundell-Fleming model represent Argentina as a Belgium with larger external shocks. Likewise, emerging market models of financial constraints are adaptations of developed economy ones with tighter financial constraints. In our work, we have advocated a model which distinguishes between the financial constraints affecting borrowing and lending among agents within an emerging economy, and those affecting borrowing from foreign lenders. This 'dual liquidity' model offers a parsimonious description of the behavior of firms, governments, and asset prices during financial crises. It also provides prescriptions for optimal policy responses to these crises.
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Suggested Citation

  • Ricardo J. Caballero & Arvind Krishnamurthy, 2002. "A Dual Liquidity Model for Emerging Markets," American Economic Review, American Economic Association, vol. 92(2), pages 33-37, May.
  • Handle: RePEc:aea:aecrev:v:92:y:2002:i:2:p:33-37
    Note: DOI: 10.1257/000282802320188952
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    References listed on IDEAS

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    1. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    2. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2001. "International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 513-548, December.
    3. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-439, May.
    4. Ricardo J. Caballero & Arvind Krishnamurthy, 2001. "International Liquidity Illusion: On the Risks of Sterilization," NBER Working Papers 8141, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Mora, Nada & Neaime, Simon & Aintablian, Sebouh, 2013. "Foreign currency borrowing by small firms in emerging markets: When domestic banks intermediate dollars," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 1093-1107.
    2. Ahmet Faruk AYSAN & Mustapha Kamel NABLI & Marie-Ange VÉGANZONÈS-VAROUDAKIS, 2007. "Governance Institutions And Private Investment: An Application To The Middle East And North Africa," The Developing Economies, Institute of Developing Economies, vol. 45(3), pages 339-377.
    3. Olivier Blanchard, 2004. "Fiscal Dominance and Inflation Targeting: Lessons from Brazil," NBER Working Papers 10389, National Bureau of Economic Research, Inc.
    4. Hutchison, Michael M. & Noy, Ilan & Wang, Lidan, 2010. "Fiscal and monetary policies and the cost of sudden stops," Journal of International Money and Finance, Elsevier, vol. 29(6), pages 973-987, October.
    5. Hutchison, Michael M. & Noy, Ilan, 2006. "Sudden stops and the Mexican wave: Currency crises, capital flow reversals and output loss in emerging markets," Journal of Development Economics, Elsevier, vol. 79(1), pages 225-248, February.
    6. Xavier Gabaix & Arvind Krishnamurthy & Olivier Vigneron, 2007. "Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market," Journal of Finance, American Finance Association, vol. 62(2), pages 557-595, April.
    7. Ahmet Faruk Aysan & …mer Faruk Baykal & Marie-Ange Véganzonès–Varoudakis, 2011. "The Effects of Convergence in Governance on Capital Accumulation in the Black Sea Economic Cooperation Countries," Chapters,in: Does Economic Governance Matter?, chapter 6 Edward Elgar Publishing.
    8. Filippo Taddei, 2007. "Liquidity and the Allocation of Credit: Business Cycle, Government Debt and Financial Arrangements," Carlo Alberto Notebooks 65, Collegio Carlo Alberto.
    9. Marie-Ange Veganzones & A. Aysan, 2007. "How Do Political and Governance Institutions Affect Private Investment Decisions? An Application to the Middle East and North Africa," Post-Print hal-00229728, HAL.
    10. Oscar Landerretche, 2007. "Job flows in chile," Working Papers wp240, University of Chile, Department of Economics.
    11. Fernando M. Gonçalves & Márcio Holland & Andrei D. Spacov, 2005. "Can Jurisdictional Uncertainty And Capital Controls Explain The High Level Of Real Interest Rates In Brazil? Evidence From Panel Data," Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33rd Brazilian Economics Meeting] 028, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    12. Mustapha Kamel Nabli, 2007. "Breaking the Barriers to Higher Economic Growth : Better Governance and Deeper Reforms in the Middle East and North Africa," World Bank Publications, The World Bank, number 6914, June.
    13. Claessens, Stijn & Schmukler, Sergio L., 2007. "International financial integration through equity markets: Which firms from which countries go global?," Journal of International Money and Finance, Elsevier, vol. 26(5), pages 788-813, September.
    14. Rodrigo Valdés P. & Kevin Cowan L. & Sebastián Edwards F., 2007. "Current Account and External Financing," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 10(3), pages 5-18, December.
    15. Eduardo Levy Yeyati & Alain Ize, 2005. "Financial De-Dollarization; Is it for Real?," IMF Working Papers 05/187, International Monetary Fund.
    16. Olivier Blanchard, 2007. "Current Account Deficits in Rich Countries," IMF Staff Papers, Palgrave Macmillan, vol. 54(2), pages 191-219, June.
    17. World Bank, 2003. "Brazil : Stability for Growth and Poverty Reduction," World Bank Other Operational Studies 14881, The World Bank.
    18. Ahmet Faruk Aysan & Zeynep Ersoy & M-A Veganzones-Varoudakis, 2007. "Does the Perception of Governance Institutions Matter for Private Investment: The Case of Middle East and North Africa," Working Papers 2007/03, Bogazici University, Department of Economics.
    19. Marie-Ange VEGANZONES-VAROUDAKIS & NABLI & Ahmet Faruk AYSAN, 2006. "Governance and Private Investment in the Middle East and North Africa," Working Papers 200627, CERDI.
    20. Akito Matsumoto, 2011. "Global Liquidity; Availability of Funds for Safe and Risky Assets," IMF Working Papers 11/136, International Monetary Fund.
    21. Gonçalves, Fernando M & Holland, Marcio & Spacov, Andrei, 2007. "Pode a incerteza jurisdctional e os controles de capitais explicarem as altas taxas reais de juros no Brasil?," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 61(1), August.
    22. Devereux, Michael B. & Sutherland, Alan, 2011. "Evaluating international financial integration under leverage constraints," European Economic Review, Elsevier, vol. 55(3), pages 427-442, April.

    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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