What's Wrong with International Financial Markets?
Inter-American Development Bank (IDB)
Harvard University - Harvard Kennedy School (HKS)
IADB Research Dept. Working Paper No. 429
Recent financial crises and contagion puts into question the wisdom of capital account liberalization. There is consensus that something is terribly wrong in the way international financial markets work for developing countries and that fixing is urgent. But what is wrong? Most views in developed countries identify the problems with too much capital flows, attracted by moral hazard. However, our analysis shows that the role of this distortion is being grossly exaggerated and that, in contrast, the main distortions in international financial markets are associated with capital flows being too little, restricted by sovereign risk, and too volatile because of market failures.
Number of Pages in PDF File: 27
Keywords: international financial architecture, financial rescue, bailout, financial crisis, liquidity crisis, financial contagion
JEL Classification: F33, F34, G15
Date posted: June 7, 2001