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NBER WORKING PAPER SERIES FINANCIAL CRISES AND LIQUIDITY SHOCKS A BANK RUN PERSPECTIVE Guillermo A Calvo Working Paper 15425 http www nber org papers w15425 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge MA 02138 October 2009 I am grateful to Alejandro Izquierdo Ivan Khotulev and Enrique Mendoza for useful comments The views expressed herein are those of the author s and do not necessarily reflect the views of the National Bureau of Economic Research 2009 by Guillermo A Calvo All rights reserved Short sections of text not to exceed two paragraphs may be quoted without explicit permission provided that full credit including notice is given to the source FINANCIAL CRISES AND LIQUIDITY SHOCKS A Bank Run Perspective Guillermo A Calvo NBER Working Paper No 15425 October 2009 JEL No E5 E58 F41 G2 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

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