FINANCIAL CRISES AND LIQUIDITY SHOCKS: A Bank-Run Perspective

Guillermo Calvo

No 15425, NBER Working Papers from National Bureau of Economic Research, Inc

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."

JEL-codes: E5 E58 F41 G2 (search for similar items in EconPapers)
Date: 2009-10
New Economics Papers: this item is included in nep-cba, nep-lam and nep-mac
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

Published as Calvo, Guillermo, 2012. "Financial crises and liquidity shocks a bank-run perspective," European Economic Review, Elsevier, vol. 56(3), pages 317-326.

Downloads: (external link)
http://www.nber.org/papers/w15425.pdf (application/pdf)

Related works:
Journal Article: Financial crises and liquidity shocks a bank-run perspective (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:15425

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w15425

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().