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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.

Suggested Citation

  • Mishkin,Frederic S., 2001. "Financial policies and the prevention of financial crises in emerging market economies," Policy Research Working Paper Series 2683, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2683
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Rajmund MIRDALA, 2010. "Monetary Aspects Of Short-Term Capital Inflows In The Central European Countries," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 5(4(14)/ Wi), pages 342-358.
    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. Constantinescu Lucreþia Mariana & Drãgoi Violeta Elena, 2015. "An Assessments Of The Banking System Performence Of Romania & United Kingdom During The Last Financial Crisis," Polish Journal of Management Studies, Czestochowa Technical University, Department of Management, vol. 11(1), pages 17-27, June.
    4. Stanislaw Gomulka, 2001. "Poland's Road to Euro: A Review of Options," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 3.
    5. Ganesh Kumar Shrestha, 2004. "Financial Sector Reforms in Nepal," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 16, pages 75-90, April.
    6. Jan Toporowski & Giovanni Cozzi, 2006. "The Balance Sheet Approach to Financial Crises in Emerging Markets," Economics Working Paper Archive wp_485, Levy Economics Institute.
    7. Ho, Sin-Yu, 2017. "The Macroeconomic Determinants of Stock Market Development: Evidence from Malaysia," MPRA Paper 77232, University Library of Munich, Germany.
    8. Lücke, Matthias & Spinanger, Dean, 2004. "Liberalisierung des internationalen Handels mit Dienstleistungen: Herausforderungen und Chancen für Entwicklungsländer," Kiel Working Papers 1228, Kiel Institute for the World Economy (IfW).
    9. repec:sbe:breart:v:29:y:2009:i:2:a:3440 is not listed on IDEAS
    10. Ho, Sin-Yu, 2017. "The Macroeconomic Determinants of Stock Market Development: Evidence from South Africa," MPRA Paper 76493, University Library of Munich, Germany.
    11. In W Song, 2004. "Foreign Bank Supervision and Challenges to Emerging Market Supervisors," IMF Working Papers 04/82, International Monetary Fund.
    12. Alexander Ballantyne & Jonathan Hambur & Ivan Roberts & Michelle Wright, 2014. "Financial Reform in Australia and China," RBA Research Discussion Papers rdp2014-10, Reserve Bank of Australia.
    13. Sakarya, Burchan, 2008. "Değişen Küresel Finansal Yapı ve 2007 Yılı Dalgalanmaları
      [Changing Global Financial Structure and 2007 Turbulances]
      ," MPRA Paper 69193, University Library of Munich, Germany.
    14. -, 2008. "Economic Survey of Latin America and the Caribbean 2007-2008: Macroeconomic policy and volatility," Estudio Económico de América Latina y el Caribe, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 1067 edited by Eclac.
    15. Schüder, Stefan, 2014. "Expansive monetary policy in a portfolio model with endogenous asset supply," Economic Modelling, Elsevier, vol. 41(C), pages 239-252.

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