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Financial policies and the prevention of financial crises in emerging market economies

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  • Mishkin, Frederic S.

Abstract

The author defines a financial crisis as a disruption in financial markets in which adverse selection and moral hazard problems become much worse, so that financial markets are unable to efficiently channel funds to those who have the most productive investment opportunities. As financial markets become unable to function efficiently, economic activity sharply contracts. Factors that promote financial crises include, mainly, a deterioration in financial sector balance sheets, increases in interest rates and in uncertainty, and deterioration in nonfinancial balance sheets because of changes in asset prices. Financial policies in 12 areas could help make financial crises less likely in emerging market economies, says the author. He discusses: Prudential supervision. Accounting and disclosure requirements. Legal and judicial systems. Market-based discipline. Entry of foreign banks. Capital controls. Reduction of the role of state-owned financial institutions. Restrictions on foreign-dominated debt. The elimination of too-big-to-fail practices in the corporate sector. The proper sequencing of financial liberalization. Monetary policy and price stability. Exchange rate regimes and foreign exchange reserves. If the political will to adopt sound policies in these areas grows in emerging market economies, their financial systems should become healthier, with substantial gains both from greater economic growth and smaller economic fluctuations.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2683.

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Date of creation: 31 Oct 2001
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Handle: RePEc:wbk:wbrwps:2683

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Keywords: Banks&Banking Reform; Financial Intermediation; Labor Policies; Payment Systems&Infrastructure; Economic Theory&Research; Banks&Banking Reform; Financial Intermediation; Economic Theory&Research; Macroeconomic Management; Environmental Economics&Policies;

References

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  1. Frederic S. Mishkin, 1991. "Asymmetric Information and Financial Crises: A Historical Perspective," NBER Chapters, in: Financial Markets and Financial Crises, pages 69-108 National Bureau of Economic Research, Inc.
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  7. Hahm, Joon-Ho & Mishkin, Frederic S., 2000. "The Korean financial crisis: an asymmetric information perspective," Emerging Markets Review, Elsevier, Elsevier, vol. 1(1), pages 21-52, May.
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Citations

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Cited by:
  1. Ganesh Kumar Shrestha, 2004. "Financial Sector Reforms in Nepal," NRB Economic Review, Nepal Rastra Bank, Research Department, Nepal Rastra Bank, Research Department, vol. 16, pages 75-90, April.
  2. Vogel, Ursula & Winkler, Adalbert, 2010. "Foreign banks and financial stability in emerging markets: Evidence from the global financial crisis," Frankfurt School - Working Paper Series 149, Frankfurt School of Finance and Management.
  3. Inwon Song, 2004. "Foreign Bank Supervision and Challenges to Emerging Market Supervisors," IMF Working Papers 04/82, International Monetary Fund.
  4. Jan Toporowski & Giovanni Cozzi, 2006. "The Balance Sheet Approach to Financial Crises in Emerging Markets," Economics Working Paper Archive wp_485, Levy Economics Institute.

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