Financial integration without the volatility
By: Ricardo J. Caballero [and] Kevin Cowan
Contributors: Cowan, Kevin; Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 06-31; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 06-31.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2006
Place of publication: Cambridge, MA
Language: eng
Number of pages: 39
Description: Integration to international capital markets is one of the key pillars of development. However, capital flows also bring volatility to emerging markets. Are there mechanisms to reap the benefits of capital flows without being hurt by their volatility? Are current practices, such as large reserves accumulation, public deleveraging, and export promotion strategies, efficient external insurance mechanisms? In this paper we start by documenting the external volatility faced by emerging markets as well as current self-insurance practices, especially among prudent economies. We then provide a simple model that illustrates the inefficient nature of these practices. We argue that with the help of the IFIs in developing the right contingent markets, similar protection could be obtained at lower cost by using financial hedging strategies. We also argue that, at least for now, local governments have an important role to play in the implementation of these external insurance mechanisms. JEL Classifications: E2, E3, F3, F4, G0, C1.
Notes: "November 27, 2006."

Includes bibliographical references (p. 33-35).

Abstract in HTML and working paper for download in PDF available via World Wide Web at the Social Science Research Network.