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What's Wrong with International Financial Markets?

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  • Ricardo Hausmann
  • Eduardo Fernández-Arias

Abstract

Recent financial crises and contagion call 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.

Suggested Citation

  • Ricardo Hausmann & Eduardo Fernández-Arias, 2000. "What's Wrong with International Financial Markets?," Research Department Publications 4225, Inter-American Development Bank, Research Department.
    • Handle: RePEc:idb:wpaper:4225
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    References listed on IDEAS

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    7. Buiter, Willem H. & Sibert, Anne, 1999. "UDROP: A Small Contribution to the New International Financial Architecture," CEPR Discussion Papers 2138, C.E.P.R. Discussion Papers.
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    13. repec:idb:wpaper:428 is not listed on IDEAS
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    Cited by:

    1. Attanasio, Orazio P. & Székely, Miguel, 2001. "Wage Shocks and Consumption Variability in Mexico during the 1990s," IDB Publications (Working Papers) 3291, Inter-American Development Bank.
    2. Kawai, Masahiro & Takagi, Shinji, 2000. "Proposed strategy for a regional exchange rate arrangement in post-crisis East Asia," Policy Research Working Paper Series 2503, The World Bank.

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