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Macroeconomics in Times of Liquidity Crises: Searching for Economic Essentials

Online ISBN:
9780262336017
Print ISBN:
9780262035415
Publisher:
The MIT Press
Book

Macroeconomics in Times of Liquidity Crises: Searching for Economic Essentials

Guillermo A. Calvo
Guillermo A. Calvo
Columbia University
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Published online:
18 May 2017
Published in print:
28 October 2016
Online ISBN:
9780262336017
Print ISBN:
9780262035415
Publisher:
The MIT Press

Abstract

The book claims that liquidity issues are at the heart of recent financial crises, and their analysis helps to explain phenomena that are alien to mainstream macroeconomic models. To make this point, the book first reviews crisis episodes starting with Mexico's Tequila crisis in 1994/5 and including the Great Recession in developed-market economies. The narrative reveals wide gaps in conventional models and the existence of stubborn intellectual inertia in dealing with these crises. The book devotes an entire chapter to discussing liquidity, highlighting that resilience with respect to Liquidity Crunch differs across liquid assets. This observation helps to rationalize a large set of phenomena, including resilience of the US dollar vis à vis other dollar-denominated liquid assets; global contagion in financial markets; effectiveness and limitations of central bank monetary policy; and negative effects of low and persistent international interest rates. Some of these phenomena – and others like secular stagnation – become evident once liquidity is explicitly introduced in mainstream models. In two econometric studies the book (1) focuses on Liquidity Crunch as an important component of “non-regular” recessions; and (2) identifies factors likely to contribute to Sudden Stop vulnerability in emerging-market economies.

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