Sudden Stops and Economic Performance: Policy Options. Liliana Rojas-Suarez April 10, 2003. How to Deal with the Volatility of Capital Flows?. The answer depends on the view regarding the causes of such volatility
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April 10, 2003
The answer depends on the view regarding the causes of such volatility
For most, however, the answer is a combination of all factors
Once again, the answer depends on the views held with regard to the efficiency of markets
Moreover, it is imperative for emerging markets to raise awareness that the implementation of Basel II in industrial countries, albeit its good intentions, may exacerbate the already high volatility of capital flows to emerging markets by:
For those who believe that market imperfections, including information asymmetries, warrant further official intervention, appropriate policies include:
Example Ia: Capital Requirements that Correctly Weight Risk
Example Ia: Capital Requirements that Correctly Weight Risk (cont.)
Example Ib: Capital Requirements that Incorrectly Weight Risk might Exacerbate the Adverse Impact of a Sudden Stop in Capital Flows
Example IIa: Adequate Loan-Loss Provisions can Help Mitigate the Effects of Volatile Capital Flows
Exchange Rate Risk Transforms into Credit Risk
Indeed, the problems associated with liability dollarization can be alleviated by adequate provisioning rules that reflect the risks specific to Latin America
It may precisely be the existence of safe deposits denominated in dollars that would allow for the expansion of the riskier domestic-currency denominated assets.