July 10, 2019

Where is the next economic crisis coming from? Nobody knows. That was the bottom line of the July 10 SIPA event “Current Issues in Monetary Policy” with distinguished American-Argentine Economist and SIPA Professor Guillermo Calvo and former Central Banker and current MPA-EPM Director Patricia Mosser. Each presented on some of the lessons learned of past economic recessions from both emerging and advanced markets and the macroprudential scenario today in the U.S. and beyond.

“Macro is in a state of turmoil,” said Calvo, suggesting that the macroeconomic models of the past may not be as useful for assessing the economic issues of today. In fact, models like the classic IS/LM (Investment Savings/Liquidity Money) did little to foresee the 2008 global recession, in part, because “we were not aware of the factors of the boom” leading up to the crisis, he explained. Along the same lines, economists overlooked the possibilities of a liquidity trap. Calvo focused his presentation on the 1998 Russian crisis and the 2008 U.S. recession, drawing connections between investment, financial market volatility, and external factors. At the end of the day, however, it’s easier to learn from the past than foresee the future, so “fasten your seatbelts!” exclaimed Calvo in closing his presentation.

Professor Guillermo Calvo

Professor Guillermo Calvo
Professor Guillermo Calvo

Intimately acquainted with the severity of the 2008 recession, Mosser, who worked at the New York Federal Reserve’s Open Market Desk, overseeing many crisis-related facilities at the time, further broke down the similarities and differences between crises in different market types and the monetary policy responses available to each. “Financial crises may be different in emerging markets and advanced markets, but at their root, they do rhyme,” said Mosser.

In the lead up to crises, both typically share characteristics like a high and rising leverage (indebtedness), asset bubbles, and financial liberalization. While no one quite knows the point at which “there’s the straw that breaks the camel’s back,” governments are left to pick up the pieces and experiment with various conventional and unconventional policy decisions to stop the bleeding through financial deleveraging or by addressing inflation. As examples, Mosser compared the situations of the 1997 Asia financial crisis, Sweden’s case in the early 1990s, and Mexico’s 1994 tequila crisis as well as the global financial crisis of 2007-09.

Professor Patricia C.Mosser

Professor Patricia C.Mosser
Professor Patricia C.Mosser

Though adjustments to interest rates are a popular measure central banks take, Calvo suggested they are a poor instrument for dealing with crises and are more useful during transition periods. At the moment, interest rates are top of mind in the United States, with the Fed concerned about downtrending inflation. “If the U.S. cuts interest rates, it’s because they are worried about an economic slowdown,” said Mosser, and “next year there is likely to be an even greater slowdown in the U.S. and globally, particularly with the possibility of less accommodating fiscal policy.”

- Elizabeth Gonzalez (MPA-EPM’20)