Trip Wires And Speed Bumps: Managing Financial Risks And Reducing The Potential For Financial Crises In Developing Economies
This paper investigates the shortcomings of the “early warning systems” (EWS) that are currently being promoted with such vigour in the multilateral and academic community. It then advocates an integrated “trip wire-speed bump” regime to reduce financial risk and, as a consequence, to reduce the frequency and depth of financial crises in developing countries. Specifically, this paper achieves four objectives. First, it demonstrates that efforts to develop EWS for banking, currency and generalized financial crises in developing countries have largely failed. It argues that EWS have failed because they are based on faulty theoretical assumptions, not least that the mere provision of information can reduce financial turbulence in developing countries. Second, the paper advances an approach to managing financial risks through trip wires and speed bumps. Trip wires are indicators of vulnerability that can illuminate the specific risks to which developing economies are exposed. Among the most significant of these vulnerabilities are the risk of large-scale currency depreciations, the risk that domestic and foreign investors and lenders may suddenly withdraw capital, the risk that locational and/or maturity mismatches will induce debt distress, the risk that non-transparent financial transactions will induce financial fragility, and the risk that a country will suffer the contagion effects of financial crises that originate elsewhere in the world or within particular sectors of their own economies. It argues that trip wires must be linked to policy responses that alter the context in which investors operate. In this connection, policymakers should link specific speed bumps that change behaviours to each type of trip wire. Third, the paper argues that the proposal for a trip wire-speed bump regime is not intended as a means to prevent all financial instability and crises in developing countries. Indeed, such a goal is fanciful. But insofar as developing countries remain highly vulnerable to financial instability, it is critical that policymakers vigorously pursue avenues for reducing the financial risks to which their economies are exposed and for curtailing the destabilizing effects of unpredictable changes in international private capital flows. Fourth, the paper responds to likely concerns about the response of investors, the IMF and powerful governments to the trip wire-speed bump approach. The paper also considers the issue of technical/institutional capacity to pursue this approach to policy. The paper concludes by arguing that the obstacles confronting the trip wire-speed bump approach are not insurmountable.
|Date of creation:||2004|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +41 22 907 12 34
Fax: +41 22 907 00 43
Web page: http://www.unctad.org/Templates/Page.asp?intItemID=2101&lang=1
More information through EDIRC
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.:
- Ethan Kaplan & Dani Rodrik, 2001.
"Did the Malaysian Capital Controls Work?,"
NBER Working Papers
8142, National Bureau of Economic Research, Inc.
- Kaplan, Ethan & Rodrik, Dani, 2001. "Did the Malaysian Capital Controls Work?," Working Paper Series rwp01-008, Harvard University, John F. Kennedy School of Government.
- Kaplan, Ethan & Rodrik, Dani, 2001. "Did the Malaysian Capital Controls Work?," CEPR Discussion Papers 2754, C.E.P.R. Discussion Papers.
- Barry Eichengreen & Charles Wyplosz, 1993. "The Unstable EMS," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 51-144.
- Hali J. Edison, 2003.
"Do indicators of financial crises work? An evaluation of an early warning system,"
International Journal of Finance & Economics,
John Wiley & Sons, Ltd., vol. 8(1), pages 11-53.
- Hali J. Edison, 2000. "Do indicators of financial crises work? an evaluation of an early warning system," International Finance Discussion Papers 675, Board of Governors of the Federal Reserve System (U.S.).
- C. E. Weller, 2001.
"Financial Crises After Financial Liberalisation: Exceptional Circumstances or Structural Weakness?,"
Journal of Development Studies,
Taylor & Francis Journals, vol. 38(1), pages 98-127.
- Weller, Christian E., 1999. "Financial crises after financial liberalization: Exceptional circumstances or structural weakness?," ZEI Working Papers B 15-1999, ZEI - Center for European Integration Studies, University of Bonn.
- Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997.
"Leading indicators of currency crises,"
Policy Research Working Paper Series
1852, The World Bank.
- J. A. Kregel, 1998.
"Derivatives and Global Capital Flows: Applications to Asia,"
- Kregel, J A, 1998. "Derivatives and Global Capital Flows: Applications to Asia," Cambridge Journal of Economics, Oxford University Press, vol. 22(6), pages 677-92, November.
- Jan A. Kregel, 1998. "Derivatives and Global Capital Flows: Applications to Asia," Economics Working Paper Archive wp_246, Levy Economics Institute.
- Philip Arestis, 2002. "Financial crisis in Southeast Asia: dispelling illusion the Minskyan way," Cambridge Journal of Economics, Oxford University Press, vol. 26(2), pages 237-260, March.
- Reinhart, Carmen & Kaminsky, Graciela, 1999.
"The twin crises: The causes of banking and balance of payments problems,"
14081, University Library of Munich, Germany.
- Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
- Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
- Wyplosz, Charles, 2001.
"How Risky is Financial Liberalization in the Developing Countries?,"
CEPR Discussion Papers
2724, C.E.P.R. Discussion Papers.
- Charles WYPLOSZ, 2001. "How Risky Is Financial Liberalization In The Developing Countries?," G-24 Discussion Papers 14, United Nations Conference on Trade and Development.
- Demirguc-Kent, Asli & Detragiache, Enrica, 1998.
"Financial liberalization and financial fragility,"
Policy Research Working Paper Series
1917, The World Bank.
- Akira Ariyoshi & Andrei Kirilenko & Inci Ã–tker & Bernard Laurens & Jorge IvÃ¡n Canales Kriljenko & Karl Friedrich Habermeier, 2000. "Capital Controls; Country Experiences with Their Use and Liberalization," IMF Occasional Papers 190, International Monetary Fund.
- Barry Eichengreen & Richard Portes, 1997. "Managing financial crises in emerging markets," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 193-225.
- Nancy P. Marion & Robert P. Flood, 1998.
"Perspectiveson the Recent Currency Crisis Literature,"
IMF Working Papers
98/130, International Monetary Fund.
- Flood, Robert & Marion, Nancy, 1999. "Perspectives on the Recent Currency Crisis Literature," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(1), pages 1-26, January.
- Robert Flood & Nancy Marion, 1998. "Perspectives on the Recent Currency Crisis Literature," NBER Working Papers 6380, National Bureau of Economic Research, Inc.
- M. Brownbridge & C. Kirkpatrick, 2000. "Financial Regulation in Developing Countries," Journal of Development Studies, Taylor & Francis Journals, vol. 37(1), pages 1-24.
- Andrew Berg & Catherine Pattillo, 1999.
"Are Currency Crises Predictable? A Test,"
IMF Staff Papers,
Palgrave Macmillan, vol. 46(2), pages 1.
- Arestis, Philip & Demetriades, Panicos O, 1997.
"Financial Development and Economic Growth: Assessing the Evidence,"
Royal Economic Society, vol. 107(442), pages 783-99, May.
- Panicos O. Demetriades & Philip Arestis, 1996. "Financial Development and Economic Growth: Assessing the Evidence," Keele Department of Economics Discussion Papers (1995-2001) 96/16, Department of Economics, Keele University.
- Singh, Ajit & Weisse, Bruce A., 1998.
"Emerging stock markets, portfolio capital flows and long-term economie growth: Micro and macroeconomic perspectives,"
Elsevier, vol. 26(4), pages 607-622, April.
- Singh, A. & Weisse, B. A., 1998. "Emerging Stock Markets, Portfolio Capital Flows and Long-term Economic Growth: Micro and Macroeconomic Perspectives," Accounting and Finance Discussion Papers 98-af40, Faculty of Economics, University of Cambridge.
- Reinhart, Carmen & Goldstein, Morris & Kaminsky, Graciela, 2000. "Assessing financial vulnerability, an early warning system for emerging markets: Introduction," MPRA Paper 13629, University Library of Munich, Germany.
- Rose, Andrew K & Svensson, Lars E O, 1993.
"European Exchange Rate Credibility Before the Fall,"
CEPR Discussion Papers
852, C.E.P.R. Discussion Papers.
- Rose, Andrew K. & Svensson, Lars E. O., 1994. "European exchange rate credibility before the fall," European Economic Review, Elsevier, vol. 38(6), pages 1185-1216, June.
- Rose, A.K. & Svensson, L.E.O., 1993. "European Exchange Rate Credibility Before the Fall," Papers 542, Stockholm - International Economic Studies.
- Andrew K. Rose & Lars E.O. Svensson, 1993. "European Exchange Rate Credibility Before the Fall," NBER Working Papers 4495, National Bureau of Economic Research, Inc.
- Reisen, Helmut, 2002.
"Ratings since the Asian Crisis,"
Working Paper Series
UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
- Reinhart, Carmen & Kaminsky, Graciela, 1998.
"On crises, contagion, and confusion,"
13709, University Library of Munich, Germany.
- M. Ayhan Kose & Kenneth Rogoff & Eswar Prasad & Shang-Jin Wei, 2003. "Effects of Financial Globalization on Developing Countries; Some Empirical Evidence," IMF Occasional Papers 220, International Monetary Fund.
- Dodd, Randall, 2002. "Derivatives, the Shape of International Capital Flows and the Virtues of Prudential Regulation," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
When requesting a correction, please mention this item's handle: RePEc:unc:g24pap:33. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joerg Mayer)
If references are entirely missing, you can add them using this form.