Economic Policy Implications of the Current Financial Instability
AbstractThe pro-cyclical behavior inherent in the operation of financial markets is at the heart of the current financial crisis. Against the arguments upheld by orthodox economists, these markets do not stabilize by themselves nor tend to smooth the private spending behavior. This problem has been worsened by the fact that the current prudential regulations are also pro-cyclical. In developing countries, the crisis has blended with structural deficiencies in the operation of the global monetary and financial system, above all the strong pro-cyclical shocks they face and the need of accumulating abundant international reserves so that they can have more room to adopt counter-cyclical macroeconomic policies. Nevertheless, this rational decision of being “self-insured” against crises may have contributed to create global payment imbalances. This paper states that these two dimensions of the world crisis –the absence of a counter-cyclical prudential regulatory framework and the massive “self-insurance” of developing countries– can only be solved with global solutions. The first problem requires the adoption of a regulatory and prudential-supervision counter-cyclical framework by all the countries. The second problem requires the design of better global instruments to manage financial crises in developing countries, so that they can have more “policy room to maneuver” in the adoption of counter-cyclical macroeconomic policies.
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Bibliographic InfoArticle provided by Central Bank of Argentina, Economic Research Department in its journal Ensayos Económicos.
Volume (Year): 1 (2009)
Issue (Month): 53-54 (January - June)
counter-cyclical policies; financial markets; global imbalances; international crisis; international reserves accumulation; prudential regulation;
Find related papers by JEL classification:
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
- F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General
- G01 - Financial Economics - - General - - - Financial Crises
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
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