Insuring Against Private Capital Flows: Is it Worth the Premium? What are the Alternatives?

Levy Economics Institute Working Paper No. 553

37 Pages Posted: 20 Jan 2009 Last revised: 14 Apr 2010

See all articles by Jörg Bibow

Jörg Bibow

Skidmore College - Department of Economics; Bard College - Levy Economics Institute

Date Written: December 2008

Abstract

Following an analysis of the forces behind the "global capital flows paradox" observed in the era of advancing financial globalization, this paper sets out to investigate the opportunity costs of self-insurance through precautionary reserve holdings. We reject the idea of reserves as low-cost protection against the vagaries of global finance. We also deny that arrangements giving rise to their rapid accumulation might be sustainable in the first place. Alternative policy options open to developing countries are explored, designed to limit both the risks of financial globalization and the costs of insurance-type responses. We propose comprehensive capital account management as an alternative to full capital account liberalization. The aims of a permanent regulatory regime of capital controls, with respect to both the aggregate size and the composition of capital flows, are twofold: first, to maintain sufficient macro policy space; second, to assure a good micro fit of external expertise incorporated in foreign direct investment as part of a country's development strategy.

Keywords: International Monetary Order, Financial Globalization, Capital Flows, Financial Crises, Capital Controls, Foreign Reserves

JEL Classification: E43, E58, F02, F32, F33, F55

Suggested Citation

Bibow, Jörg, Insuring Against Private Capital Flows: Is it Worth the Premium? What are the Alternatives? (December 2008). Levy Economics Institute Working Paper No. 553, Available at SSRN: https://ssrn.com/abstract=1326608 or http://dx.doi.org/10.2139/ssrn.1326608

Jörg Bibow (Contact Author)

Skidmore College - Department of Economics ( email )

Saratoga Springs, NY 12866
United States

Bard College - Levy Economics Institute ( email )

Blithewood Rd
Annandale on Hudson, NY 12504
United States