Financial Crises and Liquidity Shocks: A Bank-Run Perspective

23 Pages Posted: 26 Oct 2009 Last revised: 24 Feb 2023

See all articles by Guillermo A. Calvo

Guillermo A. Calvo

Columbia University - School of International & Public Affairs (SIPA); National Bureau of Economic Research (NBER)

Date Written: October 2009

Abstract

This note is motivated by trying to understand the macroeconomic implications of assuming that periods of financial bonanza and turmoil are driven by financial innovation and collapse in line with the "bank run" literature of the Diamond-Dybvig (1983) variety. Bypassing a host of important but, for the present purposes, secondary details the note assumes that the initial effects of financial innovation and crash can be summarized by a parameter that determines the "liquidity" or "moneyness" of land or capital. This simplification helps to shed light on some issues that are at the center of the policy debate. In particular, one can show that preventing price deflation is not enough to offset asset meltdown. Furthermore, lower policy interest rates increase asset prices and steady-state output which, however, gets reversed as liquidity is destroyed. An interesting result is that, in the neighborhood of a first-best capital allocation, an increase in the moneyness of capital may lower the welfare of the representative individual, even if the higher liquidity of capital is sustainable and, hence, not destroyed by future crash. Moreover, an extension of the basic model supports the conjecture that low policy interest rates may have given incentives to the development of "shadow banking."

Suggested Citation

Calvo, Guillermo A., Financial Crises and Liquidity Shocks: A Bank-Run Perspective (October 2009). NBER Working Paper No. w15425, Available at SSRN: https://ssrn.com/abstract=1493018

Guillermo A. Calvo (Contact Author)

Columbia University - School of International & Public Affairs (SIPA) ( email )

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New York, NY 10027
United States

National Bureau of Economic Research (NBER) ( email )

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