By Guillermo A. Calvo
Since the subprime personal loan main issue that all started in 2007, complex economies have felt a nagging experience of lack of confidence. In parallel, the career has witnessed phenomena which are alien to mainstream macroeconomic types. monetary crises are systemic, taking place concurrently in several economies. during this ebook, Guillermo Calvo specializes in liquidity elements as a commonality in monetary crises. in particular, he examines the position of "liquidity crunch" in triggering crises. He additionally identifies a primary (but missed) inspiration in Keynes's General Theory, termed via Calvo the fee idea of cash, to rationalize the resiliency of the U.S. greenback whilst different dollar-backed resources suffered a devastating liquidity crunch.
Calvo exhibits sharp specialize in liquidity finds a few features of liquid resources which are effortless to overlook another way. He argues for liquidity's centrality, featuring what he calls the Liquidity procedure. He exhibits that easy extensions of ordinary financial versions aid rationalize the consequences of the liquidity crunch, after which examines a little extra technical versions that spotlight liquidity matters. He explores the empirical results of liquidity crunch by means of learning systemic surprising stops (of capital inflows), presuming that they're prompted via liquidity crunch-type phenomena.
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Additional info for Macroeconomics in Times of Liquidity Crises: Searching for Economic Essentials
Summary and Next Step Major financial crises since the 1990s started at a corner of the world economy and spread across the world like wildfire. ” True, “fundamentals” deteriorated during crises, but this was largely an outcome, not a cause. • These features are shared by emerging and developed market economies alike. Market reforms are probably necessary to avoid further crises, but there is still no role model that can be followed as policy guide. • 22 Chapter 1 The challenge is to develop a framework in which financial crises have causes that go far beyond standard “fundamentals” and have deleterious effects on regions and markets that, at first, may appear largely disconnected to the epicenter (or initial location) of the crisis.
See Obstfeld et al. 11 Liquidity Crunch and Sudden Stops: Collateral Damage A liquidity crunch episode, like the one that took place around the Lehman crisis, can have severe effects on credit flows. Large and largely unexpected contractions of credit flows are called Sudden Stops (SS). 12 SS can hit an economy as a whole, as was the case in EM financial crises, or just a subsector, as in the US real estate market in the wake of the Lehman crisis episode (in which case term-mismatch between assets and liabilities may wreak chaos, even if contracts are denominated in the same unit of account; see below).
I discuss Keynes’s conjecture in Calvo (2012 a) and call it the Price Theory of Money (PTM). 9 It is extraordinary that to this day this kind of guarantee that holds in all capitalist economies has largely been overlooked by the micro- and macro-literature. I suspect the omission stems from the lack of a deep discussion of liquidity issues in macroeconomics and also the obliteration of price/wage stickiness issues from microeconomics. The PTM offers a partial rationale for the resilience of the dollar relative to other liquid assets.