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

  • Guillermo A. Calvo

    (Columbia University)

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 f 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 gSudden Stop, h 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.

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Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 31 (2013)
Issue (Month): (November)
Pages: 39-64

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Handle: RePEc:ime:imemes:v:31:y:2013:p:39-64
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  1. Guillermo Calvo & Fabrizio Coricelli & Pablo Ottonello, 2013. "Jobless Recoveries During Financial Crises: Is Inflation the Way Out?," NBER Working Papers 19683, National Bureau of Economic Research, Inc.
  2. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2006. "Phoenix Miracles in Emerging Markets: Recovering without Credit from Systemic Financial Crises," Research Department Publications 4474, Inter-American Development Bank, Research Department.
  3. Guillermo A. Calvo & Alejandro Izquierdo & Luis-Fernando Mejía, 2008. "Systemic Sudden Stops: The Relevance Of Balance-Sheet Effects And Financial Integration," NBER Working Papers 14026, National Bureau of Economic Research, Inc.
  4. Claudio Borio, 2012. "The financial cycle and macroeconomics: What have we learnt?," BIS Working Papers 395, Bank for International Settlements.
  5. Guillermo A. Calvo & Alejandro Izquierdo & Rudy Loo-Kung, 2012. "Optimal Holdings of International Reserves: Self-Insurance against Sudden Stop," NBER Working Papers 18219, National Bureau of Economic Research, Inc.
  6. Reinhart, Carmen & Reinhart, Vincent, 2010. "Diminished Expectations, Double Dips, and External Shocks: The Decade After the Fall," MPRA Paper 24969, University Library of Munich, Germany.
  7. Javier Bianchi, 2009. "Overborrowing and systemic externalities in the business cycle," FRB Atlanta Working Paper 2009-24, Federal Reserve Bank of Atlanta.
  8. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
  9. Fernando Broner & Tatiana Didier & Aitor Erce & Sergio L. Schmukler, 2011. "Gross capital flows: dynamics and crises," Working Papers 1039, Banco de España;Working Papers Homepage.
  10. Agosin, Manuel R. & Huaita, Franklin, 2012. "Overreaction in capital flows to emerging markets: Booms and sudden stops," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1140-1155.
  11. Guido Lorenzoni, 2008. "Inefficient Credit Booms," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 809-833.
  12. Michael D. Bordo, 2006. "Sudden Stops, Financial Crises, and Original Sin in Emerging Countries: Déjà vu?," NBER Working Papers 12393, National Bureau of Economic Research, Inc.
  13. Reinhart, Karmen & Rogoff, Kenneth, 2009. ""This time is different": panorama of eight centuries of financial crises," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 77-114, March.
  14. Dani Rodrik & Andres Velasco, 1999. "Short-Term Capital Flows," NBER Working Papers 7364, National Bureau of Economic Research, Inc.
  15. von Hayek, Friedrich August, 1989. "The Pretence of Knowledge," American Economic Review, American Economic Association, vol. 79(6), pages 3-7, December.
  16. Guillermo A. Calvo & Fabrizio Coricelli & Pablo Ottonello, 2012. "Labor Market, Financial Crises and Inflation: Jobless and Wageless Recoveries," NBER Working Papers 18480, National Bureau of Economic Research, Inc.
  17. Guillermo A. Calvo, 2005. "Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262033348, December.
  18. Dvorak, Tomas, 2003. "Gross capital flows and asymmetric information," Journal of International Money and Finance, Elsevier, vol. 22(6), pages 835-864, November.
  19. Robert J. Gordon, 1993. "The Jobless Recovery: Does It Signal a New Era of Productivity-led Growth?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 271-316.
  20. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  21. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  22. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 35-54, November.
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