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TOWARD AN ECONOMIC THEORY OF REALITY: AN INTERVIEW WITH GUILLERMO A. CALVO
- ENRIQUE G. MENDOZA
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- Journal:
- Macroeconomic Dynamics / Volume 9 / Issue 1 / February 2005
- Published online by Cambridge University Press:
- 01 February 2005, pp. 123-145
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- Article
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Guillermo Calvo is one of the most influential economists in the field of international macroeconomics of the past 30 years. He has produced seminal articles in every area of macroeconomics and international economics that he has worked on, including his early classic articles on capacity utilization and time inconsistency, his 1980's works on efficiency wages, price stickiness, and policy credibility, and his recent studies on sudden stops and emerging market crises. Yet, the defining feature of Guillermo Calvo's contribution to our profession is not the depth and wide scope of the economic theories he has developed, but the central emphasis he puts in all his work on the role of economics as a tool for understanding reality and improving the quality of human life.
Guillermo Calvo's passion for the policy implications of economic theory is obvious to anyone who has met him since his days as Senior Advisor of the Research Department of the IMF in the mid-1980's. This feature of his professional interests was much less obvious to those who interacted with him during his early years as an important figure of the rational expectations revolution. It was probably hard to see that behind the highly technical treatment presented in his articles at that time was an author who had his feet soundly set on the ground and focused on understanding how society could benefit from the renaissance of macroeconomic theory that was taking place. Interestingly, Michael Rothschild did figure out the true nature of Guillermo Calvo in those early years. When the University of California at San Diego tried to hire Calvo in the mid-1980's, Rothschild explained to Calvo that he was an excellent fit for San Diego because he was a particular type of theoretician: “Most theoreticians make theory out of theory,” Rothschild noted, but Calvo was different because he made “theory out of reality, taking what is really out there and presenting it in a much wider and complex form than a well-developed but narrow theory.”
The following pages are excerpts from three interview sessions that Guillermo Calvo and I had at his office in the Inter-American Development Bank in the spring of 2003. These interviews provide a clear summary picture of Calvo as the theoretician of reality that Michael Rothschild described. The recollection of the conversation with Rothschild is one of many fascinating memories of Calvo's personal life and professional career that emerged during our meetings. We taped and transcribed the three meetings in Spanish and then Calvo and I together edited that material to produce this much shorter interview in English for Macroeconomic Dynamics.
7 - Credit frictions and ‘Sudden Stops’ in small open economies: an equilibrium business cycle framework for emerging markets crises
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- By Cristina Arellano, PhD economics graduate student at Duke University., Enrique G. Mendoza, Professor of International Economics and Finance at the University
- Edited by Sumru Altug, Koç University, Istanbul, Jagjit S. Chadha, Charles Nolan, University of Durham
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- Book:
- Dynamic Macroeconomic Analysis
- Published online:
- 13 September 2019
- Print publication:
- 20 November 2003, pp 335-405
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Summary
INTRODUCTION
The severe financial and economic crisis that hit Mexico after the devaluation of the peso in December 1994, and the unprecedented ‘Tequila effect’ by which Mexico's financial woes ‘infected’ emerging markets world-wide were a harbinger of a period of intense turbulence in international capital markets. Seven years later, in December 2001, a major crisis broke out in Argentina with an explosive combination of sovereign default, massive currency devaluation and collapse of economic activity. In the seven years separating the Mexican and Argentine crises, similar crises engulfed nearly all of the so-called ‘emerging markets,’ including Hong Kong, Korea, Indonesia, Malaysia, Thailand, Russia, Chile, Colombia, Ecuador, Brazil and Turkey. Interestingly, devaluation itself proved not to be a prerequisite for these crises, as the experiences of Argentina in 1995 and Hong Kong in 1997 showed. ‘Contagion effects’ similar to the ‘Tequila effect’ were also typical, as crises spread quickly to countries with no apparent economic linkages to countries in crisis. A favourite example is the correction in US equity prices in the autumn of 1998 triggered by the Russian default. The systemic nature of this correction forced the US Federal Reserve to lower interest rates and coordinate the orderly collapse of hedge fund Long Term Capital Management.
Emerging markets crises are characterised by a set of striking empirical regularities that Calvo (1998) labelled the ‘Sudden Stop’ phenomenon. These empirical regularities include: (a) a sudden loss of access to international capital markets reflected in a collapse of capital inflows, (b) a large reversal of the current account deficit, (c) collapses of domestic production and aggregate demand, and (d) sharp corrections in asset prices and in the prices of non-traded goods relative to traded goods. Figures 7.1–7.3 illustrate some of these stylised facts for Argentina, Korea, Mexico, Russia and Turkey. Figure 7.1 shows recent time series data for each country's current account as a share of GDP. Sudden Stops are displayed in these plots as sudden, large swings of the current account that in most cases exceeded five percentage points of GDP. Figure 7.2 shows data on consumption growth as an indicator of real economic activity. These plots show that Sudden Stops are associated with a collapse in the real sector of the economy.
12 - The International Macroeconomics of Taxation and the Case against European Tax Harmonization
- Edited by Elhanan Helpman, Harvard University, Massachusetts, Efraim Sadka, Tel-Aviv University
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- Book:
- Economic Policy in the International Economy
- Published online:
- 03 November 2009
- Print publication:
- 27 March 2003, pp 329-370
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Summary
International macroeconomic theory shows that domestic tax policy in a global economy affects foreign economic conditions via complex, dynamic interactions through relative prices, tax revenues, and wealth distribution. This paper proposes a tractable quantitative framework for assessing tax policies that is consistent with this theory. The significance of the international transmission channels of tax policy is evaluated in the context of a “workhorse” two-country dynamic general equilibrium model. The model is used to assess the potential effects of the European harmonization of capital income taxes. The results show that this policy, if enacted along the lines followed in harmonizing value-added taxes, yields large capital outflows and a significant erosion of tax revenue for Continental Europe while the opposite effects benefit the United Kingdom. Welfare in the United Kingdom rises as result, while Continental Europe may incur a substantial welfare cost.
Introduction
One of the main themes of Assaf Razin's extensive research program is the analysis of the policy implications of the dynamic macroeconomic theory of international taxation. In joint work with Jacob Frenkel, with Elhanan Helpman, and with Efraim Sadka, Razin produced seminal contributions that were among the first to formalize the microfoundations of the intertemporal analysis of tax policies in open economies. These studies were part of a growing literature that examined the international implications of tax policies within the context of dynamic general equilibrium models.