Since the mid-1990s, emerging market economies have been hit by dramatic highs and lows: lifted by large capital inflows, then plunged into chaos by constrained credit and out-of-control exchange rates. The conventional wisdom about such crises is strongly influenced by the experience of advanced economies. In Emerging Capital Markets in Turmoil, Guillermo Calvo examines these issues instead from the perspective of emerging market economies themselves, taking into account the limitations and vulnerabilities these economies confront.A succession of crises -- Mexico in 1994-5, East Asia in 1997, Russia in 1998, and Argentina in 2001 -- prompted an urgent search in economic policy circles for cogent explanations. Calvo begins by laying the groundwork for a new approach to these issues. In the theoretical chapters that follow, he argues that financial crisis theory regarding emerging markets has progressed from focusing on such variables as fiscal deficits, debt sustainability, and real currency devaluation to stressing the role of the financial sector -- emphasizing stocks rather than flows as well as the role credibility plays in containing financial crises. He then returns to a more empirical analysis and focuses on exchange-rate issues, considering the advantages and disadvantages of flexible exchange rates for emerging market economies. Coming after a decade of ongoing crises, Calvo's timely reassessment of the importance of external factors in making emerging market economies safer from financial turmoil offers important policy lessons for dealing with inevitable future episodes of financial crises.

Emerging Capital Markets In Turmoil: Bad Luck Or Bad Policy?

Business & Money

Calvo, Guillermo A.

Economics

Mit Pr

An examination of Liquidity Crunch in triggering and characterizing financial crises.
Since the subprime mortgage crisis that began in 2007, advanced economies have felt a nagging sense of insecurity. In parallel, the profession has witnessed phenomena that are alien to mainstream macroeconomic models. Financial crises are systemic, occurring simultaneously in different economies. In this book, Guillermo Calvo focuses on liquidity factors as a commonality in financial crises. Specifically, he examines the role of “liquidity crunch” in triggering crises. He also identifies a fundamental (but overlooked) idea in Keynes's General Theory, termed by Calvo the price theory of money, to rationalize the resiliency of the U.S. dollar when other dollar-backed assets suffered a devastating liquidity crunch.
Calvo shows that a sharp focus on liquidity reveals some characteristics of liquid assets that are easy to miss otherwise. He argues for liquidity's centrality, presenting what he calls the Liquidity Approach. He shows that simple extensions of standard monetary models help rationalize the implications of the liquidity crunch, and then examines slightly more technical models that highlight liquidity issues. He explores the empirical effects of liquidity crunch by studying systemic sudden stops (of capital inflows), presuming that they are triggered by liquidity crunch-type phenomena.

Macroeconomics in Times of Liquidity Crises: Searching for Economic Essentials (Ohlin Lectures)

The MIT Press

This volume consists of 18 essays dedicated to the memory of Carlos Diaz-Alejandro on topics that reflect his interests and contributions to the history and theory of international trade and economic development. The issues covered include historical perspectives on the LDC debt crisis and proposals for its solution, stabilization problems in the Southern Cone of Latin America, and new approaches in open economy macroeconomics, the theory of international trade and economic development. This volume is based on a conference held in honour of Carlos Diaz-Alejandro under the auspices of the World Institute of Development Economics Research (WIDER).

Debt, Stabilization, and Development: Essays in Memory of Carlos Diaz-Alejandro

Findlay, Ronald

Kouri, Pentti

De Macedo, Jorge Braga

Blackwell Pub.

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