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Macroeconomics in Times of Liquidity CrisesSearching for Economic Essentials$
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Guillermo A. Calvo

Print publication date: 2016

Print ISBN-13: 9780262035415

Published to MIT Press Scholarship Online: May 2017

DOI: 10.7551/mitpress/9780262035415.001.0001

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Financial Crises and the Slow Mutation of Conventional Wisdom

Financial Crises and the Slow Mutation of Conventional Wisdom

(p.3) 1 Financial Crises and the Slow Mutation of Conventional Wisdom
Macroeconomics in Times of Liquidity Crises

Guillermo Calvo

The MIT Press

This chapter sets the stage for the rest of the book by offering a brief narrative of financial crises since Mexico's Tequila crisis in 1994/5 and including the Great Recession in developed-market economies, which are hard to rationalize in terms of mainstream models. The objective is to highlight factors common to these crises, in particular systemic crisis episodes in which several economies are involved at about the same time. These crises are accompanied by sudden and sharp falls in credit flows with serious consequences on the real economy. In emerging market economies, for example, output bounce-back did not entail an equivalent credit recovery. These episodes of asymmetric bust/recovery are called Phoenix Miracles. The chapter also highlights the efficacy of central banks in preventing a replay of the Great Deflation but it also points out their inability to prevent major recession.

Keywords:   Great Recession, Phoenix Miracles, Systemic Crisis, Tequila, Central Banks

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