www.ebook3000.com Macroeconomics in Times of Liquidity Crises www.ebook3000.com The Ohlin Lectures Protectionism Jagdish Bhagwati Economic Stabilization and Debt in Developing Countries Richard N Cooper Unemployment and Macroeconomics Assar Lindbeck Political Economy of Policy Reform in Developing Countries Anne O Krueger Factor Proportions, Trade, and Growth Ronald Findlay Development, Geography, and Economic Theory Paul Krugman Unintended Consequences: The Impact of Factor Endowments, Culture, and Politics on Long-Run Economic Performance Deepak Lal Globalization and the Theory of Input Trade Ronald W Jones Too Sensational: On the Choice of Exchange Rate Regimes W Max Corden Globalization and the Poor Periphery before 1950 Jeffrey G Williamson The Development and Testing of Heckscher-Ohlin Trade Models: A Review Robert E Baldwin Offshoring in the Global Economy: Microeconomic Structure and Macroeconomic Implications Robert C Feenstra Trade Policy Disaster: Lessons from the 1930s Douglas A Irwin The Craft of Economics: Lessons from the Heckscher-Ohlin Framework Edward E Leamer Macroeconomics in Times of Liquidity Crises: Searching for Economic Essentials Guillermo Calvo See http://mitpress.mit.edu for a complete list of titles in this series Macroeconomics in Times of Liquidity Crises Searching for Economic Essentials Guillermo Calvo The MIT Press Cambridge, Massachusetts London, England www.ebook3000.com © 2016 Massachusetts Institute of Technology All rights reserved No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher This book was set in Palation by Toppan Best-set Premedia Limited Printed and bound in the United States of America Library of Congress Cataloging-in-Publication Data Names: Calvo, Guillermo A., author Title: Macroeconomics in times of liquidity crises : searching for economic essentials / Guillermo A Calvo Description: Cambridge, MA : MIT Press, 2016 | Series: The Ohlin lectures | Includes bibliographical references and index Identifiers: LCCN 2016016503 | ISBN 9780262035415 (hardcover : alk paper) Subjects: LCSH: Liquidity (Economics) | Financial crises | Money | Macroeconomics Classification: LCC HG178 C35 2016 | DDC 339 dc23 LC record available at https://lccn.loc.gov/2016016503 10  9  8  7  6  5  4  3  2  In grateful memory of Professor Julio H G Olivera, who motivated and inspired generations of Argentine economists www.ebook3000.com Contents Preface  ix Introduction  xv I Toward the Liquidity Approach  1 Financial Crises and the Slow Mutation of Conventional Wisdom  The Liquidity Approach to Financial Crises  23 Monetary Theory: Overview and Liquidity Extensions  51 Nominal Anchoring with Liquid Monetary Policy Assets  75 Liquidity Crunch/Trap: Some Unconventional Output/Employment/Growth Implications  85 www.ebook3000.com viii II Contents Emerging Market Crises through the Lens of the Liquidity Approach  109 Introduction to Part II  111 Systemic Sudden Stops: Crises and Recoveries in EMs  117 Guillermo Calvo and Pablo Ottonello Systemic Sudden Stops: The Relevance of Balance-Sheet Effects and Financial Integration  143 Guillermo Calvo, Alejandro Izquierdo, and Luis-Fernando Mejía Appendix Tables  173 Technical Appendix: Inference with Random-Effects Probits under Endogeneity  195 Walter Sosa Escudero Notes  201 References  217 Index  233 References 227 Levy-Yeyati, Eduardo, and Federico Sturzenegger 2005 Classifying exchange rate regimes: Deeds vs words European Economic Review 49 (6): 1603–1635 Levy-Yeyati, Eduardo 2006 Financial dollarisation: Evaluating the consequences Economic Policy 21 (45): 61–118 Mehrling, Perry 2010 The New Lombard Street: How the Fed Became the Dealer of Last Resort Princeton: Princeton University Press Mendoza, Enrique G 2006 Endogenous sudden stops in a business cycle model with collateral constraints: A Fisherian deflation of Tobin’s q NBER working paper 12564 Mendoza, Enrique G 2010 Sudden stops, financial crises, and leverage American Economic Review 100 (5): 1941–1966 Mendoza, Enrique G., and Marco E Terrones 2012 An anatomy of credit booms and their demise NBER working paper 18379 Mendoza, Enrique G 2010 Sudden stops, financial crises, and leverage American Economic Review 100 (5): 1941–1966 Mendoza, Enrique G., Vincenzo Quadrini, and José-Víctor Ríos-Rull 2009 Financial integration, financial development, and global imbalances Journal of Political Economy 117 (3): 371–416 Merler, S., and Jean Pisani-Ferry 2012 Sudden stops in the euro area Bruegel Policy Contribution (2012/06, March) Meza, Felipe, and Erwan Quintin 2007 Factor utilization and the real impact of financial crises B.E Journal of Macroeconomics (1): 1–39 Midrigan, Virgiliu, and Daniel Yi Xu 2014 Finance and misallocation: Evidence from plant-level data American Economic Review 104 (2): 422– 458 Milesi-Ferretti, Gian Maria, and Assaf Razin 2000 Current account reversals and currency crises: Empirical regularities In Currency Crises, ed P Krugman, 285–323 Chicago: University of Chicago Press Minsky, Hyman P 2008a Stabilizing an Unstable Economy New York: McGraw Hill Minsky, Hyman P 2008b John Maynard Keynes New York: McGraw Hill www.ebook3000.com 228 References Mishkin, Frederic S 2006 The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich Princeton: Princeton University Press Morris, Stephen, and Hyun Song Shin 1998 Unique equilibrium in a model of self-fulfilling currency attacks American Economic Review 88 (3): 587–597 Nakamura, Emi, Jón Steinsson, Robert Barro, and José Ursúa 2013 Crises and recoveries in an empirical model of consumption disasters American Economic Journal Macroeconomics (3): 35–74 Neumeyer, Pablo A., and Fabrizio Perri 2005 Business cycles in emerging economies: The role of interest rates Journal of Monetary Economics 52 (2): 345–380 Oberfield, Ezra 2013 Productivity and misallocation during a crisis: Evidence from the Chilean crisis of 1982 Review of Economic Dynamics 16 (1): 100–119 Obstfeld, Maurice 1986 Rational and self-fulfilling balance-of-payments crisis American Economic Review 76 (March): 72–81 Obstfeld, Maurice, and Kenneth Rogoff 1983 Speculative hyperinflations in maximizing models: Can we rule them out? Journal of Political Economy 91 (4): 675–687 Obstfeld, Maurice, and Kenneth Rogoff 1986 Ruling out divergent speculative bubbles Journal of Monetary Economics 17 (May): 346–362 Obstfeld, Maurice, Jay C Shambaugh, and Alan M Taylor 2010 Financial stability, the trilemma, and international reserves American Economic Journal Macroeconomics (2): 57–94 Ottonello, Pablo 2014 Capital unemployment, financial shocks, and investment slumps Mimeo Columbia University Patinkin, Don 1949 The indeterminacy of absolute prices in classical economic theory Econometrica 17 (1): 1–27 Patinkin, Don 1965 Money, Interest, and Prices New York: Harper and Row Pratap, Sangeeta, and Carlos Urrutia 2012 Financial frictions and total factor productivity: Accounting for the real effects of financial crises Review of Economic Dynamics 15 (3): 336–358 Queraltó, Albert 2013 A model of slow recoveries from financial crises FRB International Finance Discussion Paper 1097 References 229 Radelet, Steven, and Jeffrey Sachs 1998 The East Asian financial crisis: Diagnosis, remedies, prospects Brookings Paper 28 (1): 1–74 Ranciere, Romain, Aaron Tornell, and Frank Westermann 2006 Decomposing the effects of financial liberalization: Crises vs growth NBER working paper 12806 Razin, Assaf, and Yona Rubinstein 2004 Exchange rate regimes, capital account liberalization and growth and crises: A nuanced view Mimeo Tel-Aviv University Reinhart, Carmen M., and Christoph Trebesch 2014 A distant mirror of debt, default, and relief NBER working paper 20577 Reinhart, Carmen M., and Kenneth Rogoff 2008 Is the 2007 U.S sub-prime financial crisis so different? An international historical comparison NBER working paper 13761 Reinhart, Carmen M., and M Belen Sbrancia 2011 The liquidation of government debt NBER working paper 16893 Reinhart, Carmen M., and Vincent R Reinhart 2010 After the fall NBER working paper 16334 Reinhart, Carmen, and Ken Rogoff 2009 The aftermath of financial crises American Economic Review 99 (2): 466–472 Reis, Ricardo 2013 The Portuguese slump and crash and the euro crisis Brookings Papers on Economic Activity 46 (1): 143–210 Rioja, Felix, Fernando Rios-Avila, and Neven Valev 2014 The persistent effect of banking crises on investment and the role of financial markets Journal of Financial Economic Policy (1): 64–77 Rivers, D., and Q Vuong 1988 Limited information estimators and exogeneity tests for simultaneous Probit models Journal of Econometrics 39:347–366 Rodrik, Dani, and Andres Velasco 1999 Short-term capital flows NBER working paper 7364 (also published in Annual World Bank Conference on Development Economics 1999) Rothenberg, D and Francis Warnock 2006 Sudden flight and true sudden stops NBER working paper 12726 Saffie, Felipe E., and Sınâ T Ates 2013 Fewer but better: Sudden stops, firm entry, and financial selection Mimeo University of Maryland www.ebook3000.com 230 References Sahay, Ratna, Vivek Arora, Thano Arvanities, Hamid Faruqee, Papa N’Diaye, Tommaso Mancini-Grifoli, and IMF Team 2014 Emerging market volatility: Lessons from the Taper tantrum IMF staff discussion note SND/14/09 Sandleris, Guido, and Mark L J Wright 2014 The costs of financial crises: Resource misallocation, productivity, and welfare in the 2001 Argentine Crisis Scandinavian Journal of Economics 116 (1): 87–127 Schmitt-Grohé, Stephanie, and Martın Uribe 2014 Forthcoming Downward nominal wage rigidity, currency pegs, and involuntary unemployment Journal of Political Economy Shimer, Robert 2012 Wage rigidities and jobless recoveries Journal of Monetary Economics 59:S65–S77 Shourideh, Ali, and Ariel Zetlin-Jones 2012 External financing and the role of financial frictions over the business cycle: Measurement and theory Available at SSRN 2062357 Stockman, Alan 1981 Anticipated inflation and the capital stock in a cash-in-advance economy Journal of Monetary Economics 8:387–393 Stokey, Nancy L 2013 Wait-and-see: Investment options under policy uncertainty MBER working paper 19630 Teulings, Coen, and Richard Baldwin 2014 Secular Stagnation: Facts, Causes and Cures London: VoxEu Tobin, James 1965 Money and Economic Growth Econometrica 33 (4): 671–684 Tsiang, S C 1980 Keynes’s “finance” demand for liquidity, Robertson’s loanable funds theory, and Friedman’s monetarism Quarterly Journal of Economics 94 (3): 467–491 Turner, Adair 2015 Between Debt and the Devil: Money, Credit and Fixing Global Finance Princeton: Princeton University Press Turner, Philip 2013 The global long-term interest rate, financial risks and policy choices in EMEs Presented before Inter-American Development Bank’s 38th Meeting of Chief Economists of Central Banks and Finance Ministries Woodford, Michael 1990 Public debt as private liquidity American Economic Review 80 (2): 382–388 References 231 Woodford, Michael 1995 Price level determinacy without control of a monetary aggregate Carnegie-Rochester Conference Series on Public Policy 43 (3): 1–46 Woodford, Michael 2003 Interest and Prices: Foundations of a Theory of Monetary Policy Princeton: Princeton University Press Woodford, Michael 2009 How important is money in the conduct of monetary policy? Journal of Money, Credit and Banking 40 (8): 1561–1598 Wooldridge, Jeffrey M 2002 Econometric Analysis of Cross Section and Panel Data Cambridge: MIT Press www.ebook3000.com Index Aggregate investment and systemic sudden stops, 125–28 Aghion, Philippe, 148 Arellano, Cristina, 148, 163 Argentina, 9–10, 164, 205n20 Arrow—Debreu model, 26 Arteta, Carlos O., 157, 213n28 Asset-backed securities (ABS), 29–30 shadow banking and, 42–44 Ates, Sinâ, 130 Bacchetta, Philippe, 148 Banerjee, Abhijit, 148 Banking credit and liquidity requirements of, 70–72 credit flows and 3S crises, 120–23 shadow, 42–45, 85 Bank runs, 28 inverse, 43, 44–45, 50 3S crises and, 122 Barter equilibriums, 203n8 Base money, 19, 34 “Basket of goods,” 25–26, 203n4 Bonds, liquid, 75–77, 85, 88 cash-in-advance constraint, 88–89 endogenous bond return, 97–98 flexible prices, 77–81 interest rate increasing faster than inflation, 80–81, 207n8 staggered prices, 81–83 Brady plan, 59 Bubbles, 56, 64–65 Caballero, Ricardo, 168 Calvo, Guillermo, 12, 21, 32, 37, 62, 66 in inflation, 61, 62 on jobless and wageless recoveries, 106, 107, 123 on liquidity shocks, 28, 64, 73, 83, 99 on measure of crisis, 150, 151 on recovery in emerging markets, 122 on relative price volatility under Sudden Stops, 115, 119, 130 on shocks spread from one country to another, 147–48 on staggered prices, 54, 76, 81, 82 on sudden changes in TFP, 132 on Sudden Stops, 125, 127, 151, 163, 213n28 Canzoneri, Matthew, 76 Capital account reversals, 151 www.ebook3000.com 234 Capital market capital flight, 31–35, 206n9 effect of subprime crisis on global, 14–15 liquidity shocks, 60–61 Cash-in-advance condition, 68, 88–89 Cavallo, Eduardo, 213n28 Cerra, Valerie, 130 Christiano, Lawrence J., 59 Collateral distortions, 37 Consumption and systemic sudden stops, 125–28 Coricelli, Fabrizio, 106, 107, 123 Cowan, K., 151 Credibility of central banks, 53–54 Cumby, Robert E., 76 Currencies multiple, 31–33 Price Theory of Money (PTM) and, 24, 28–31, xvi—xvii substitution, 46, 205n2, 208n10 Current account deficit (CAD), 113–14, 152 as determinant of Sudden Stops, 156–62, 211–12n9, 212n12 Davison, A., 166, 198 Debt See also Public debt default, 59–60 deflation, 35, 41–42 Deflation debt, 35, 41–42 liquidity, 37–42 price, 86 De Gregorio, J., 151 Demand side of liquidity effects, 61–66 banks and credit in, 70–72 systemic sudden stops and, 118 Determinants of Sudden Stops, 156–65 Deus ex machina, 52, 73 Index Developed market economies (DMs), 4, xv Lehman crisis effect on, 15–18 price deflation in, 86 public debt levels in, 20, 204n11 quantitative easing in, 18–21 Diamond—Dybvig approach to liquidity, xvii—xviii Diba, Bezhad, 76 Domestic liability dollarization (DLD), 113–14, 148, 149, 211n8, 215n46 as determinant of Sudden Stops, 157–62, 211–12n9, 212n12 Dot-com crisis, 204–205n19 East Asian crisis, 6, 119–20, xv current account deficits during, as 3S crisis, 153 Edwards, Sebastian, 150, 213n28, 215n46 Eichengreen, Barry, 165 EMBI (Emerging Market Bond Index), 7–8, 209–10n3, 213n22 subprime crisis effect on, 15–18 Systemic Sudden Stops and, 10, 119, 155 Emerging market economies (EMs), 4, xv average current account balance, 1991–2004, 7–8 Bond Index spread, 1991–2004, 7–8 capital flight in, 31–35, 206n9 effect of quantitative easing in DMs on, 20 effect of subprime crisis on, 15–18 fiat monies, 32 inverse bank runs and, 45, 50 onset of crises in, 4–9 recovery from crisis in, 9–12 1998 Russian crisis effects on, total factor productivity in, 132 Index 235 Employment and TFP, 130–33 Endogenous bond return, 97–98 Equilibrium multiplicity, 66 European Central Bank, 204n11, 209n3 Exchange rate regime and Sudden Stops, 162–63 Exports and systemic sudden stops, 125–28 Extrinsic liquidity, 26–27, 30–31, 35–36, 63, 74 Factors of production, 12, 36–37 total factor productivity, 130–33, 210n12 Fannie Mae, 19, xv—xvi Fiat monies, 32, 33–34 Finance motive, 87–88, 208m2 slow jobless/wageless recovery after, 105–107 Financial crises, 3–4 See also Liquidity crunch/trap critical assessment of monetary theory in times of, 72–74 debt deflation in, 35 indicators of, 150–51 liquidity and, 23–24, 47–48 money demand in, 85–88 multiple currencies and, 31–33 onset in emerging market economies, 4–9 recovery in emerging market economies, 9–12 roadblocks to empirical analysis of, 111–12 3S (see Systemic Sudden Stops (3S)) Fiscal theory of the price level (FTPL), 58–61, 205–206n8 Fischer, Stanley, 42, 66 Fisher, Irving, 34, 41, 49, 52, 85 rational expectations model and, 54, 56 Fitzgerald, Terry J., 59 Flexible prices, 77–81 Flight to quality, xvi Flow budget constraint, 78–79 Frankel, Jeffrey, 165, 213n28 Freddie Mac, 19 Friedman, Milton, 34, 38, 46, 97 Full-capacity output, 67 General Theory, 29, 46, 47, 87, xvi Gopinath, Gita, 133 Government debt See Public debt Great Depression, 34, 41, 86, 111, 132 Great Moderation period, 9, 36, xv Greece crisis, 59 Gross domestic product (GDP) domestic liability dollarization and, 158 government balance as share of, 164 measures of fixed current account deficits as share of, 152 3S crises and, 122, 134–37 Growth monetary policy and, 102–104 rate and inflation, 68 slow post-crisis, 105–107 Guilkey, D., 196, 198 Hayek, Friedrich August von, Heckman, J., 195 Hicks, John R., 23 Hinkley, D., 166, 198 Holmström, Bengt, 73 Honohan, Patrick, 158 Hsiao, C., 195 Hyperinflation, 57, 205n20 Illusion, liquidity, 48 Inflation, 12, 46–47, xix, xx fiat currencies and, 32 flow budget constraint and, 78–79 www.ebook3000.com 236 Inflation (cont.) FTPL and, 61 full employment output and, 67–69, 82 hyper-, 57, 205n20 increases to counter liquidity trap, 99 jobless recovery and, 105 liquidity and, 35, 84, 87 monetary policy fueling, 13, 46–47, 99 price of land and, 63–64 profit-maximizing and, 89–90 rate of growth and, 68 rational expectations and, 53, 54 stabilization programs, 57 stagflation and, 67, 96–97 System Sudden Stops and, 118, 123–25 Taylor principle and, 77 wages and, 123 Interest rates bubbles and, 56 cost of holding money and, 62–63 hyperinflation and, 57 liquidity and real, 107–108 nominal anchoring, 75–76 policy neutrality, 202–203n11 real estate bubble and, 64–65 total liquidity and, 79–80 International Monetary Fund, 3, Argentina and, 9–10 Flexible Credit Line, 204n10 Intrinsic collateral, 106, 107 Intrinsic liquidity, 26–27, 30–31, 63 Intrinsic pledgeability, 26 Inverse bank runs, 43, 44–45, 50 Izquierdo, Alejandro, 113 on effects of Sudden Stops on output, 151, 163, 213n28 on investment and 3S, 125, 127 Index on real exchange rate (RER), 148 on recovery in emerging markets, 122 on relative price volatility under Sudden Stops, 115, 119, 130 on sudden changes in TFP, 132 Jobless/wageless recovery, 106–107 JPMorgan, 119, 213n22 Kehoe, Timothy Jerome, 130 Keynes, John Maynard, 3, 24, 29, 47–48, xvi on finance motive for holding money, 87 on money and theory of value, 52 new Keynesian approach to theories of, 51, 54–58, 99 Knight, Frank H., 115 Korea, 214n39 Latin American Debt Crises, 9–10, 119, 164, 205n20 Lehman crisis, 6, 111 effect on EMBI, 15–18 Fed rate and, 13–14 money market shock and, 60–61 price deflation and, 86 quantitative easing after, 18–21 Levhari, D., 66 Levy-Yeyati, Eduardo, 158, 162–63 Liquid bonds, 75–77, 85, 88 cash-in-advance constraint, 88–89 endogenous bond return, 97–98 flexible prices, 77–81 interest rate increasing faster than inflation, 80–81, 207n8 staggered prices, 81–83 Liquidity, 75–77, xvi—xx approach, 23–24, 47–48, 48–50 deflation, 37–42 Index 237 demand side models, 61–66 deus ex machina and, 52, 73 Diamond—Dybvig approach to, xvii—xviii extrinsic versus intrinsic, 26–27, 30–31, 35–36, 63, 74 financial engineering of, 44 fiscal theory of the price level (FTPL) and, 60 flexible prices and, 77–81 in-advance constraint, 89–96, 102–104, 208m6 mischief, 38 opportunity cost of, 62, 71, 90, 92, 94–97, 102–104, 209n12 rational expectations model and, 56 real interest rate and, 107–108 requirements and credit, 70–72 shadow banking and international, 42–45 shocks, 60–61 stagflation and, 96–97 staggered prices and, 81–83 supply side models, 66–70 TED spread and, 14, 17, 202n8 total, 75–84 Liquidity crunch/trap, 24–28, 85–88, xvi basic model, 88–98 demand for money and, 86–88 endogenous bond return and, 97–98 growth and, 102–104 impact on credit flows, 33–36 impact on relative price of factors of production, 36–37 liquidity illusion and, 48 monetary policy and, 99–102 Sudden Stops and, 33–37, 98 Local path convergence, RE, 54 Loo-Kung, Rudy, 115, 119, 130 Lopez-Salido, David, 76 Means of Exchange (MOE), 52, xvi Mejía, Luis-Fernando, 113, 151, 213n28 Mendoza, Enrique G., 132, 148, 163 Mexico See Tequila crisis (Mexico) Meza, Felipe, 132 Midrigan, Virgiliu, 130 Minsky, Hyman P., 47–48, 51 Mischief, liquidity, 38 Modeling of money, 52–54, 203n3 new Keynesian approach, 54–58 Momentum effect, 43 Monetary policy credibility, 53–54, 57 fiscal theory of the price level (FTPL) and, 58–61 liquidity traps and, 99–102 Taylor’s principle and total liquidity, 75–77 welfare costs, 57–58 Monetary theory, 51 barebones central bank rational expectations model and, 54–58 critical assessment of crises and, 72–74 demand side of liquidity effects, 61–66 fiscal theory of the price level (FTPL), 58–61 functions of money and, 52 modeling “money,” 52–54 new Keynesian approach to, 51, 54–58, 99 rational expectations in, 53–54 supply side of liquidity effects, 66–70 Moral hazard, 43 Morris, Stephen, 66, 74 Mortgage-backed securities (MBS), 34 in quantitative easing, 33–34 runs on, 63 www.ebook3000.com 238 Mortgage-backed securities (MBS) in quantitative easing, 19 Murphy, J., 196, 198 Neiman, Brent, 133 New Keynesian approach, 51, 54–58, 99 Nominal anchoring flexible prices and, 77–81 staggered prices and, 81–83 Taylor’s principle and total liquidity, 75–77 North American Free Trade Agreement (NAFTA), Oberfield, Ezra, 133 Onset of crises in emerging market economies, 4–9 Opportunity cost of liquidity, 62, 71, 90, 92, 94–97, 102–104, 209n12 of liquidity-in-advance, 106–107 of money, 41, 67, 100, 207n8 Organization for Economic Co-operation and Development (OECD), Ottonello, Pablo, 106, 107, 112, 123 Output dynamics with systemic sudden stops, 128–30 Overindebtedness, unplanned, 34–35 Panageas, Stavros, 168 Patinkin, D., 52, 66 “Phoenix Miracles,” 122 Pledgeability, 25–26 Prescott, Edward C., 130 Prices deflation, 86 effect of liquidity creation collateralized by real assets on, 63–64 Index fiscal theory of the price level (FTPL), 58–61, 205–206n8 inflation and land, 63–64 perfectly flexible, 77–81 staggered, 81–83, 206n18 sticky, 54–55, 75–76 systemic sudden stops and relative, 123–25 Price Theory of Money (PTM), 24, 28–31, 48–50, xvi—xvii fiat monies and, 32 inflation and, 46–47 liquidity deflation and, 37–38 price stickiness and, 54–55 supply side liquidity effects and, 68 Probit model, 159–60, 166–67, 213–214n32, 213n31 country data and Rivers—Vuong approach, 175–86 inference with random-effects probits under endogeneity, 195–99 reduced to latent variable models, 214n41 Public debt in developed market economies, 20, 204n11 high level of US, 203n7 as liquid assets, 42, 60, 88, 101 liquidity deflation and, 40–41 “operation twist,” 19, 100 Quantitative easing (QE), 18–21, 75 ineffectiveness, 41 negative results of, 208n10 toxic assets and, 100–102, 208n10 Queraltó, Albert, 130 Quintin, Erwan, 132 Radelet, Steven, 150 Ranciere, Romain, 215n44, 215n46 Rational expectations (RE), 53 Index 239 barebones central bank model, 54–58 Real exchange rate (RER), 145–48, 153, 155, 156–57, 211n4 Recovery from crisis in emerging market economies, 9–12 slow jobless/wageless, 105–107 Reinhart, Carmen M., 32, 105, 138 Reinhart, Vincent R., 105 Relative prices and 3S crises, 123–25 Reserve currency, 31 Rivers, D., 165, 196–97, 214n41 Rivers—Vuong test, 165, 178–86, 214n42 Robustness checks of endogeneity in Sudden Stops, 165–70, 213–14n32 Rodrik, Dani, 150, 164 Rogoff, Kenneth, 138 Rose, Andrew, 165 Rothenberg, D., 151 Russian crisis, 6–7, 120, 163 current account deficits during, 7, EMBI (Emerging Market Bond Index) during, 7–8 as 3S crisis, 153 Sachs, Jeffrey, 150 Saffie, Felipe E., 130 Sandleris, Guido, 133 Saving glut, 36 Saxena, Sweta Chaman, 130 Schwartz, Anna J., 34, 97 Secular stagnation, 113, 202n5 Shadow banking, 42–45, 85 Shi, Anqing, 158 Shin, Hyun Song, 66, 74 Shocks liquidity, 60–61 systemic, 44 Slow growth after crisis, 105–107 Solvency, 42 Stagflation, 67, 96–97 Staggered prices, 81–83, 206n18 Stagnation, secular, 113, 202n5 Sticky prices, 54–55, 75–76 Stockman, Alan, 66–67, 68–69, 88, 208m2 Store of value, money as, 52 Sturzenegger, Federico, 162–63 Subprime crisis, 12–18 dot-com crisis and, 204–205n19 economists’ views changed by, xv—xvi effect on emerging markets, 15–18 effect on global capital market, 14–15 fall of real estate relative prices during, 34–35 interest rates and, 64–65 multiple currencies and, 31–33 Price Theory of Money and, 28–31 sense of insecurity following, xv stock of subprime mortgages and, 13 variable interest rates and, 12 Sudden Stops, 5, 6, 50, 112, 202n1 addressing endogeneity in, 165–70 capital account reversals in, 151 country data, 173–74 credit flows, 45 current account deficit (CAD) and domestic liability dollarization (DLD) and, 113–15, 211–12n9, 211n8, 212n12, 215n46 under current account surpluses, 211n5 data appendix, 190–93 definition and characterization of, 150–55, 213n28 empirical analysis of determinants of, 156–65 www.ebook3000.com 240 Sudden Stops (cont.) exchange rate regime and, 162–63 liquidity crunch and, 33–37, 98 portfolio integration results, 187–89 Rivers—Vuong test, 165, 178–86 robustness checks of endogeneity in, 165–70, 213–14n32 Sudden Stops, Systemic (3S), 10, 117–18, 133–34 aggregate investment, consumption, and exports with, 125–28 bank credit flows and, 120–23 basic framework, 145–50 changes in key relative prices with, 118 credit contractions in, 146–47 data, 134–37 definition and characterization of, 150–55 EMBI and, 10, 119, 155 initial triggers, 143–45 methodology for analysis of, 118–20 output dynamics with, 128–30 panel PROBIT data, 175–80 real exchange rate (RER) in, 145–48, 153, 155, 156–57 recovery from, 117 sample episodes, 137–38 spread from one country to another, 147–48 statistical tests, 139, 139–41 total factor productivity and, 130–33, 210n12 tradables vs nontradables in, 145–46, 156–62, 211n2–3 window, 119 Summers, Larry, 113 Supply side of liquidity effects, 66–70 Systemic shocks, 44 Index Systemic Sudden Stops (3S), 10, 117–18, 133–34 aggregate investment, consumption, and exports with, 125–28 bank credit flows and, 120–23 basic framework, 145–50 changes in key relative prices with, 118 credit contractions in, 146–47 data, 134–37 definition and characterization of, 150–55 EMBI and, 10, 119, 155 initial triggers, 143–45 methodology for analysis of, 118–20 output dynamics with, 128–30 panel PROBIT data, 175–80 real exchange rate (RER) in, 145–48, 153, 155, 156–57 recovery from, 117 sample episodes, 137–38 spread from one country to another, 147–48 statistical tests, 139, 139–41 total factor productivity and, 130–33, 210n12 tradables versus nontradables in, 145–46, 156–62, 211n2–3 window, 119 Talvi, Ernesto, 122, 125, 127, 132 “Taper Tantrum,” 18 Taylor’s principle, 55, 57, 75–77 flexible prices and, 80–81 staggered prices and, 83 TED spread, 14, 17, 202n8 Tequila crisis (Mexico), 5–6, 119, 202n2 EMBI (Emerging Market Bond Index) during, 7–8 as 3S crisis, 153–55 Index 241 Tirole, Jean, 73 Tornell, Aaron, 215n44, 215n46 Total factor productivity (TFP), 130–33, 210n12 Total liquidity, 75–84 flexible prices and, 77–81 staggered prices and, 81–83 Toxic assets, 100–102, 204n11 Treasury bills See Public debt Unit of account, money as, 52, 55 Unplanned overindebtedness, 34–35 Végh, Carlos, 61, 62, 76, 99–100 Velasco, Andres, 150, 164 Vuong, Q., 165, 196–97, 214n41 Wageless/jobless recovery, 106–107 Warnock, Francis, 151 Welfare costs of monetary policy, 57–58 Westermann, Frank, 215n44, 215n46 Woodford, Michael, 46 Wooldridge, J., 197, 214n41 Wright, Mark L J., 133 Xu, Daniel Yi, 130 www.ebook3000.com ... Heckscher-Ohlin Framework Edward E Leamer Macroeconomics in Times of Liquidity Crises: Searching for Economic Essentials Guillermo Calvo See http://mitpress.mit.edu for a complete list of titles in this... Title: Macroeconomics in times of liquidity crises : searching for economic essentials / Guillermo A Calvo Description: Cambridge, MA : MIT Press, 2016 | Series: The Ohlin lectures | Includes... Macroeconomics in Times of Liquidity Crises Searching for Economic Essentials Guillermo Calvo The MIT Press Cambridge, Massachusetts London, England www.ebook3000.com © 2016 Massachusetts Institute