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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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Monetary Theory: Overview and Liquidity Extensions

Monetary Theory: Overview and Liquidity Extensions

(p.51) 3 Monetary Theory: Overview and Liquidity Extensions
Macroeconomics in Times of Liquidity Crises

Guillermo Calvo

The MIT Press

The chapter points out some deficiencies of the mainstream model utilized by many central banks. It also reviews the Fiscal Theory of the Price level. Extending the barebones version of the central banks' model presented here to the case in which "land" is endowed with liquidity, the chapter shows, among other things, that if land is subject to Liquidity Crunch, increasing the supply of liquidity by pump-priming high-powered money fails to send land's relative price back to pre-liquidity-shock level. This helps to give a rationale for Quantitative Easing in which the central bank purchases "toxic assets" with high-powered money. The chapter includes extensions to account for banks and liquidity as a factor of production, and it ends with a critique of the new crop of financial crisis models, especially those stressing non-linear constraints.

Keywords:   Central Bank, Fiscal Theory of Money, Quantitative Easing, Toxic Assets, Land Price, Liquidity

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