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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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PRINTED FROM MIT PRESS SCHOLARSHIP ONLINE (www.mitpress.universitypressscholarship.com). (c) Copyright The MIT Press, 2022. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in MITSO for personal use.date: 27 June 2022

The Liquidity Approach to Financial Crises1

The Liquidity Approach to Financial Crises1

(p.23) 2 The Liquidity Approach to Financial Crises1
Macroeconomics in Times of Liquidity Crises

Guillermo Calvo

The MIT Press

The chapter focuses sharply on liquid assets, and is the heart of the book. It distinguishes between intrinsic and extrinsic liquidity, centering on the latter. Extrinsic liquidity may break down on the spur of the moment and generate socially costly Liquidity Crunch. A substantive part of the chapter is devoted to discussing relative resilience of liquid assets, and focuses on Keynes's Price Theory of Money, the resilience of the US dollar, the weakness of bonds denominated in that currency, and of currencies of emerging-market economies. The chapter claims that recent financial crises can realistically be modeled as old-fashioned bank runs, and that assets' liquidity may be a function of policy. Special attention is paid to a phenomenon called Liquidity Deflation, which helps to rationalize Liquidity Trap as a consequence of loss of money liquidity rather than on the conventional explanation based on the infinite interest elasticity of money demand.

Keywords:   Extrinsic Liquidity, Liquidity Crunch, Price Theory of Money, Liquidity Depression, Liquidity Trap

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