Managing Financial Integration and Capital Mobility -- Policy Lessons from the Past Two Decades

39 Pages Posted: 20 Apr 2016

See all articles by Joshua Aizenman

Joshua Aizenman

National Bureau of Economic Research (NBER)

Brian Pinto

Independent

Date Written: August 1, 2011

Abstract

The accumulated experience of emerging markets over the past two decades has laid bare the tenuous links between external financial integration and faster growth, on the one hand, and the proclivity of such integration to fuel costly crises on the other. These crises have not gone without learning. During the 1990s and 2000s, emerging markets converged to the middle ground of the policy space defined by the macroeconomic trilemma, with growing financial integration, controlled exchange rate flexibility, and proactive monetary policy. The OECD countries moved much faster toward financial integration, embracing financial liberalization, opting for a common currency in Europe, and for flexible exchange rates in other OECD countries. Following their crises of 1997-2001, emerging markets added financial stability as a goal, self-insured by building up international reserves, and adopted a public finance approach to financial integration. The global crisis of 2008-2009, which originated in the financial sector of advanced economies, meant that the OECD "overshot" the optimal degree of financial deregulation while the remarkable resilience of the emerging markets validated their public finance approach to financial integration. The story is not over: with capital flowing in droves to emerging markets once again, history could repeat itself without dynamic measures to manage capital mobility as part of a comprehensive prudential regulation effort.

Keywords: Debt Markets, Emerging Markets, Currencies and Exchange Rates, Banks & Banking Reform, Economic Theory & Research

Suggested Citation

Aizenman, Joshua and Pinto, Brian, Managing Financial Integration and Capital Mobility -- Policy Lessons from the Past Two Decades (August 1, 2011). World Bank Policy Research Working Paper No. 5786, Available at SSRN: https://ssrn.com/abstract=1921742

Joshua Aizenman (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Brian Pinto

Independent ( email )

No Address Available
United States

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