Monetary and Economic Studies Vol.31 / November 2013

The Mayekawa Lecture: Puzzling over the Anatomy of Crises—Liquidity and the Veil of Finance

Guillermo A. Calvo

The paper claims that conventional monetary theory obliterates the central role played by media of exchange in the workings and instability of capitalist economies; and that a significant part of the financial system depends on the resiliency of paper currency and liquid assets that have been built on top of it. The resilience of the resulting financial tree is questionable if regulators are not present to adequately trim its branches to keep it from toppling due to its own weight or minor wind gusts. The issues raised in the paper are not entirely new, but have been ignored in conventional theory. This is very strange, because disregard for these key issues has lasted for more than half a century. Are we destined to continue making the same mistake? The paper argues that a way to prevent this is to understand the issues’ roots, and traces them to the Keynes/Hicks tradition. In addition, the paper presents a narrative and some empirical evidence suggesting a key channel from Liquidity Crunch to “Sudden Stop,” which supports the view that liquidity/credit shocks have been a central factor in recent crises. In addition, the paper claims that liquidity considerations help to explain (1) why a credit boom may precede a financial crisis, (2) why capital inflows grow in the run-up to balance-of-payments crises, and (3) why gross flows are procyclical.

Keywords: Financial crises; Bubbles; Sudden Stop


Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2013 Bank of Japan All Rights Reserved.

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