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The effectiveness of self-protection policies for safeguarding emerging market economies from crises

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  • Kletzer, Kenneth M.
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    Abstract

    The recent financial crises in emerging markets have motivated a number of proposed measures that might regulate or provide protection against readily reversible external capital flows. Possible reforms include the adoption of self-protection policies by developing countries that augment traditional macroeconomic and financial sector measures for preventing crises. One set of proposals seek to enhance the liquidity of governments during a crisis, while other proposals seek to reduce exposure to short-term external debt. This paper analyzes some major proposals for self-protection using alternative models of the causes of financial crises in open economies. The effectiveness of liquidity enhancing measures and of capital controls for crisis prevention is shown to depend upon the alleged underlying cause of potential crises. It is also possible that liquidity enhancement could be counterproductive. The economic impact of recent crises on afflicted countries has led some economists to question whether the benefits of capital account liberalization outweigh the costs of exposure to greater volatility in real economic performance. A simple approach for comparing, in simulation, the benefits of capital account openness to the costs of exposure to financial crises is discussed in the first part of the paper. --

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    Bibliographic Info

    Paper provided by ZEI - Center for European Integration Studies, University of Bonn in its series ZEI Working Papers with number B 08-2000.

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    Date of creation: 2000
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    Handle: RePEc:zbw:zeiwps:b082000

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    1. Reinhart, Carmen & Khan, Mohsin, 1995. "Macroeconomic Management in APEC Economies: The Response to Capital Inflows," MPRA Paper 8148, University Library of Munich, Germany.
    2. Kenneth M. Kletzer and Brian D. Wright., 1998. "Sovereign Debt as Intertemporal Barter," Center for International and Development Economics Research (CIDER) Working Papers C98-100, University of California at Berkeley.
    3. Menzie D. Chinn & Kenneth M. Kletzer, 2000. "International Capital Inflows, Domestic Financial Intermediation and Financial Crises under Imperfect Information," NBER Working Papers 7902, National Bureau of Economic Research, Inc.
    4. Reinhart, Carmen & Montiel, Peter, 1999. "Do capital controls influence the volume and composition of capital flows? Evidence from the 1990s," MPRA Paper 13710, University Library of Munich, Germany.
    5. Dani Rodrik & Andres Velasco, 1999. "Short-Term Capital Flows," NBER Working Papers 7364, National Bureau of Economic Research, Inc.
    6. Kenneth Kletzer & Mark Spiegel, 1996. "Speculative capital inflows and exchange rate targeting in the Pacific Basin," Pacific Basin Working Paper Series 96-05, Federal Reserve Bank of San Francisco.
    7. Manuel Agosin & Ricardo French-Davis, 1997. "Managing capital inflows in Chile," Estudios de Economia, University of Chile, Department of Economics, vol. 24(2 Year 19), pages 297-326, December.
    8. Martin Feldstein, 1999. "Self-Protection for Emerging Market Economies," NBER Working Papers 6907, National Bureau of Economic Research, Inc.
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