Macroeconomics in Times of Liquidity Crises

From Ohlin Lectures

Macroeconomics in Times of Liquidity Crises

Searching for Economic Essentials

By Guillermo A. Calvo

An examination of Liquidity Crunch in triggering and characterizing financial crises.





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.


$35.00 X ISBN: 9780262035415 264 pp. | 5.375 in x 8 in 15 charts


  • A basic definition of liquidity in economics refers to how easy it is to convert an asset to cash. Liquidity is fickle in times of crisis and yet its role is often overlooked in standard crises explanations. Guillermo Calvo's elegant analysis of the elusive concept of liquidity coupled with his insightful studies of some of the major crises of the past few decades make this book essential reading for economists, investors, and policy makers who are interested in gaining a deeper understanding of financial crises and their impacts.

    Carmen M. Reinhart

    Minos A. Zombanakis Professor of the International Financial System, Harvard University; coauthor of This Time Is Different: Eight Centuries of Financial Folly

  • Liquidity accounts for both the strengths and the weaknesses of modern monetary economies, claims Guillermo Calvo. His price theory of money gives new meaning to the old adage that an emerging currency is one from which one tries to emerge in an emergency. Essential reading for anyone trying to understand recent financial crises in both rich and poor nations.

    Andrés Velasco

    Professor of Professional Practice in International Development, Columbia University

  • Throughout his distinguished career, Guillermo Calvo has always sought to uncover the deeper economic truths that surround us. With this book, he does it again! Calvo forces us to re-calibrate our intellectual frameworks to grasp some of the most important questions: What lies behind financial crises? Which macro stabilization policies should we pursue? What accounts for the structure of the international monetary system? He argues convincingly that liquidity plays a major role in all these phenomena. Intellectually stimulating, his new book opens new vistas for future research.

    Pierre-Olivier Gourinchas

    Professor of Economics, University of California, Berkeley; editor-in-chief of IMF Economic Review