Responses to Volatile Capital Flows: Controls, Asset Liability Management and Architecture

The economic costs of financial crises in emerging markets have been sub stantial. In this article we evaluate government policies design to mitigate these costs in the context of an insurance model of crises. Our conclusions are unconventional in that policies proposed would not be appropriate for industrial countries. First, capital controls can be welfare improving. Second, the scale of financial intermediation by emerging market govern ments should be strictly limited to minimise capital gains and losses that can generate crises. Finally, debt management by emerging market govern ments should consider the costs of alternative debt structures in the event of default.