Workshop on Financial Crises

On 26 January, the Center for Financial Studies (CFS) organized a workshop on financial crises under the auspices of the Deutsche Bank Prize in Financial Economics. Guillermo Calvo, Professor of Economics, International and Public Affairs at Columbia University, and Nobuhiro Kiyotaki, Professor of Economics at Princeton University, talked about their latest research. Mirko Wiederholt, Professor of Macroeconomics at Goethe University Frankfurt, opened the workshop and welcomed speakers and audience.

At first, Kiyotaki talked about his recent paper “Banking, Liquidity and Bank Runs in an Infinite Horizon Economy” (joint with Mark Gertler). Kiyotaki presented a macroeconomic model of banking crises that allows for bank runs. Whether a bank run is feasible in the model depends on the bank’s leverage ratio and the liquidation price for bank assets, he explained. Kiyotaki showed how values such as output develop in the model in different simulation scenarios of recessions: without a bank run, with an unanticipated bank run and with an anticipated bank run. Finally, Kiyotaki named some policy implications of the model. For example, he said that higher capital requirements would reduce bank’s risk-taking and the probability of a bank run. However, at the same time, these could increase the financial intermediation costs if capital is costly to raise.

Secondly, Calvo gave a presentation entitled “Liquidity: Puzzles and Challenges”. He explained his Price Theory of Money which states that fiat money that has no intrinsic value gets valuable in terms of output because prices are sticky and, thus, will not be modified in the short run (money’s output anchor). This would help to sustain fiat money's liquidity premium and would lower the risk of a liquidity meltdown, he said. For example, mortgage‐backed securities would not have melted down in the subprime crisis to the extent they did if wages and prices had been quoted in terms of mortgage‐backed securities instead of dollars, Calvo explained. Furthermore, he named factors that debilitate the money’s output anchor such as floating exchange rates, currency substitutions or high inflation. These factors would make economies more vulnerable to global financial shocks, he said.

In the second part of his presentation, Calvo showed an analysis of recession episodes. He explained that he had used a sample of advanced and emerging economies in order to find out how labor markets recovered after crisis situations. One of his main results is that inflation can help to get unemployment back to pre-crisis levels but, at the same time, usually leads to lower real wages in the labor market.


>> Speech Prof. Kiyotaki's as video
>> Q&A Prof. Kiyotaki as video

>> Speech Prof. Calvo's as video
>> Q&A Prof. Calvo as video



>> Prof. Kiyotaki's presentation as pdf file

>> Prof. Calvo's presentation as pdf file


>> Link to Professor Calvo's paper:

>> Link to Professor Kiyotaki's paper: