December 19, 2016

Guillermo Calvo is a professor of international and public affairs at SIPA who has directed the School’s MPA in Economic Policy Management for almost a decade. A specialist in the macroeconomics of emerging market and transition economies, Calvo has in his recent work dealt extensively with capital flows and balance-of-payments crises in emerging market economies.

In late October Calvo published Macroeconomics in Times of Liquidity Crisis, which examines how liquidity factors cause financial crises. By drawing attention to overlooked truths about liquid assets, the book offers economists and policymakers knowledge to better respond to future financial crises. SIPA News recently spoke with Calvo about the book, his career at SIPA, and more.

What is the intended audience for this book?

The audience is very wide—from laymen to professional economists who are trying to make sense of what happens in emerging markets and developed economies.

What do you want people to take away from your book?

That there are some basic malfunctions in the payment system that should have made them expect that, sooner or later, the type of crisis that we are in was going to happen.

There are two reasons why it took us by surprise. In advanced economies, the last time we saw something like this was in the 1930s. Economists had concluded this wouldn’t happen anymore because we knew how to run the economy to avoid these accidents. The other reason is that economists were not looking closely at what happened in emerging markets.

Since the 1990s there have been crises in emerging markets that look very similar to what we have here. For example, in 1998 there was a crisis in Russia—which at the time represented less than 1 percent of the world’s GDP—that still caused a big impact in most of the emerging markets, taking the world by surprise. Since it had happened in an emerging market, the easy conclusion was that once emerging markets developed further they would no longer experience shocks like that. What we know now is that this kind of crisis can happen anywhere.

What separates your book from others about the financial crisis?

There are two types of books that you can read about the crisis: one gives you details about the crisis, while the other tries to give you a broader picture about the basic issues within the economic system. Is it that we are living in a world of crooks, or is there something wrong with the capitalist system? I lean toward the latter notion that there is something wrong in the capitalist system, and I identify what’s wrong with it in the title of the book: liquidity problems.

I try to make some basic observations to make the reader think critically about why we use paper money when it is useless for consumption and production. I found that John Maynard Keynes has also thought about this and provides an explanation, which is covered in Chapter 2 in plain English. Economists missed that the crisis was coming because we missed basic observations about paper money or, more generally, liquidity.

What are you working on now?

In 1993, I coauthored a paper arguing that interest rates in the United States could have a severe impact on emerging markets, particularly in Latin America. We said to be careful because, in those days, the U.S. interest rate was unusually low. Unfortunately, our concerns were validated by Mexico's “Tequila Crisis” of 1994-95, as the Fed interest rate increased by about 3 percentage points in 1994. We can observe some parallels between then and now. The Fed is talking about raising interest rates. Mr. Trump has been saying that he wants to invest in infrastructure, which will increase the fiscal deficit and most likely increase interest rates. I would expect that to have a negative effect on emerging markets, and that is already happening.

[In mid-December] I’m going to Uruguay and Argentina to talk about these issues and about what they can do. When interest rates start to rise in the United States, short-term capital will flow back to the U.S. and possibly produce a “sudden stop.” This is what happens when the flow of credit dries up very suddenly and in very large amounts. It’s a very costly shock—immediately you will have unemployment, output will fall, and the political apparatus will get reshuffled. I’m trying to alert these countries to that fact that something serious may be about to happen and to be prepared. They will need to join forces and present a solid front to handle the coming shock. But cooperation will be difficult because of politics and populist waves that usually accompany these episodes.

What keeps you teaching at SIPA?

I left Columbia’s economics department in 1986, and when I was invited to SIPA in 2007 I thought I would be here for three years. It’s been about 10 years now, and I’m having a ball because I direct a program [the MPA in Economic Policy Management, or MPA-EPM] with around 50 students from more than 20 countries. These are mid-career policymakers and economic practitioners; they come from the private sector, central banks, finance ministries, etc. I can open up the Financial Times and point at an article and everyone will jump in and have an opinion. It’s extremely interesting.

It’s rewarding to send so many MPA-EPM students to summer internships and hear things from their employers like “Wow, they hit the ground running” and “They really know what’s going on.” The students also keep in touch with us and amongst themselves. This year we are going to celebrate the 25th year of MPA-EPM together with the 70th anniversary of SIPA. So what more can I ask for?

It’s wonderful that you are able to develop such a strong bond with your students.

That’s what we do at SIPA. The advantage of MPA-EPM is that these people are 30- and 40-year-olds who are experienced and have a good background in economics. They are very motivated people and I don’t have to start from the basics. Of course, teaching anyone is a great privilege. At this stage in my life, where I have a whole career behind me, I want to transmit as much as possible.

— Serina Bellamy MIA ’17