Toward an Economic Theory of Reality: an Interview with Guillermo A. Calvo

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