IADB Research Dept. Working Paper No. 429
27 Pages Posted: 7 Jun 2001
Date Written: August 2000
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.
Keywords: international financial architecture, financial rescue, bailout, financial crisis, liquidity crisis, financial contagion
JEL Classification: F33, F34, G15
Suggested Citation: Suggested Citation
Fernandez-Arias, Eduardo and Hausmann, Ricardo, What's Wrong with International Financial Markets? (August 2000). IADB Research Dept. Working Paper No. 429. Available at SSRN: https://ssrn.com/abstract=238629 or http://dx.doi.org/10.2139/ssrn.238629