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Economic Policy Implications of the Current Financial Instability

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  • José Antonio Ocampo Gaviria

    (Columbia University)

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    Abstract

    The 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 Info

    Article provided by Central Bank of Argentina, Economic Research Department in its journal Ensayos Económicos.

    Volume (Year): 1 (2009)
    Issue (Month): 53-54 (January - June)
    Pages: 191-215

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    Handle: RePEc:bcr:ensayo:v:1:y:2009:i:53-54:p:191-215

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    Related research

    Keywords: counter-cyclical policies; financial markets; global imbalances; international crisis; international reserves accumulation; prudential regulation;

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. José Antonio Ocampo, 2007. "The Instability and Inequities of the Global Reserve System," Working Papers 59, United Nations, Department of Economics and Social Affairs.
    2. Claudio Borio & Craig Furfine & Philip Lowe, 2001. "Procyclicality of the financial system and financial stability: issues and policy options," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 1-57 Bank for International Settlements.
    3. Stiglitz, Joseph & Ocampo, Jose Antonio & Spiegel, Shari & Ffrench-Davis, Ricardo & Nayyar, Deepak, 2006. "Stability with Growth: Macroeconomics, Liberalization and Development," OUP Catalogue, Oxford University Press, number 9780199288144.
    4. White, William R., 2005. "Procyclicality in the Financial System: Do We Need a New Macrofinancial Stabilization Framework?," Kiel Economic Policy Papers 2, Kiel Institute for the World Economy (IfW).
    5. Hyman P. Minsky, 1992. "The Financial Instability Hypothesis," Economics Working Paper Archive wp_74, Levy Economics Institute.
    6. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2003. "An Essay on the Revived Bretton Woods System," NBER Working Papers 9971, National Bureau of Economic Research, Inc.
    7. José Antonio Ocampo, 2007. "The Instability and Inequities of the Global Reserve System," International Journal of Political Economy, M.E. Sharpe, Inc., vol. 36(4), pages 71-96, December.
    8. M. Ayhan Kose & Kenneth Rogoff & Eswar Prasad & Shang-Jin Wei, 2003. "Effects of Financial Globalization on Developing Countries," IMF Occasional Papers 220, International Monetary Fund.
    9. Serra, Narcis & Stiglitz, Joseph E. (ed.), 2008. "The Washington Consensus Reconsidered: Towards a New Global Governance," OUP Catalogue, Oxford University Press, number 9780199534098.
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