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The Mayekawa Lecture: Puzzling over the Anatomy of Crises- Liquidity and the Veil of Finance

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  • Guillermo A. Calvo

    (Columbia University)

Abstract

The paper claims that conventional monetary theory obliterates the central role played by media of exchange in the workings and instability of capitalist economies; and that a significant part of the financial system depends on the resiliency of paper currency and liquid assets that have been built on top of it. The resilience of the resulting financial tree is questionable if regulators are not present to adequately trim its branches to keep it from toppling due to its own weight or minor wind gusts. The issues raised in the paper are not entirely new, but have been ignored in conventional theory. This is very strange, because disregard for these key issues has lasted for more than half a century. Are we destined to continue making the same mistake? The paper argues that a way to prevent this is to understand the issues' roots, and traces them to the Keynes/Hicks tradition. In addition, the paper presents a narrative and some empirical evidence suggesting a key channel from Liquidity Crunch to "Sudden Stop," which supports the view that liquidity/credit shocks have been a central factor in recent crises. In addition, the paper claims that liquidity considerations help to explain (1) why a credit boom may precede a financial crisis, (2) why capital inflows grow in the run-up to balance-of-payments crises, and (3) why gross flows are procyclical.

Suggested Citation

  • Guillermo A. Calvo, 2013. "The Mayekawa Lecture: Puzzling over the Anatomy of Crises- Liquidity and the Veil of Finance," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 31, pages 39-64, November.
  • Handle: RePEc:ime:imemes:v:31:y:2013:p:39-64
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    File URL: https://www.imes.boj.or.jp/research/papers/english/me31-4.pdf
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    References listed on IDEAS

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    3. Cavallo, Eduardo & Powell, Andrew & Pedemonte, Mathieu & Tavella, Pilar, 2015. "A new taxonomy of Sudden Stops: Which Sudden Stops should countries be most concerned about?," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 47-70.
    4. Haakon Kavli & Nicola Viegi, 2017. "Are Determinants of Portfolio Flows Always the Same? - South African Results from a Time Varying Parameter Var Model," South African Journal of Economics, Economic Society of South Africa, vol. 85(1), pages 3-27, March.
    5. Pablo Agnese & Jana Hromcová, 2018. "Bubble economics and structural change: the cases of Spain and France compared," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 21(1), pages 59-79, January.
    6. Cachanosky, Nicolás & Lewin, Peter, 2016. "An empirical application of the EVA® framework to business cycles," Review of Financial Economics, Elsevier, vol. 30(C), pages 60-67.
    7. Salter, Alexander W. & Smith, Daniel J., 2019. "Political economists or political economists? The role of political environments in the formation of fed policy under burns, Greenspan, and Bernanke," The Quarterly Review of Economics and Finance, Elsevier, vol. 71(C), pages 1-13.
    8. Cachanosky, Nicolas, 2014. "The effects of U.S. monetary policy on Colombia and Panama (2002–2007)," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(3), pages 428-436.
    9. Andreas Hardhaug Olsen, 2015. "Wilhelm Röpke and Richard C. Koo On Secondary Deflations and Balance Sheet Recessions," Economic Affairs, Wiley Blackwell, vol. 35(2), pages 215-224, June.

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