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This chapter shows how volatility can emerge endogenously, in a world where credit constraints sometimes bind. An elementary theoretical framework is developed, which generates endogenous and persistent volatility in a growing economy with credit constraints. The basic mechanisms are the interaction of credit constraints and endogenous changes in market prices. It is argued that the model can account for a number of observed facts about lending booms and crises in emerging market economies. It also provides additional arguments in favour of countercyclical budgetary policies in less financially developed economies.

This chapter shows that the Russian 1998 crisis had a big impact on capital flows to Emerging Market Economies (EMEs), especially in Latin America, and that the impact of the Russian shock differs quite markedly across EMEs. To illustrate this statement, the polar cases of Chile and Argentina are compared. While Chile exhibited a significant economic slowdown after August 1998, it did not suffer the excruciating collapse suffered by Argentina, where even the payments system came to a full stop. This difference is attributed to the fact that Chile is more open to trade than Argentina, and that it appears to suffer much less from balance-sheet currency-denomination mismatch that was rampant in Argentina before the 2002 crisis (due to large domestic liability dollarization). The chapter is essentially descriptive but is in line with and, thus, complements econometric studies like Calvo, Izquierdo, and Mejia (NBER Working Paper 10520). The final section addresses policy issues in light of the chapter's findings and conjectures.

This chapter examines the impact of the financial policies of industrial countries on the financial crises in emerging market economies. It analyzes the macroeconomic policies of the Group of Seven (G7) countries and the role of the G7 and the International Monetary Fund (IMF) in the management of international crises. This chapter identifies macroeconomic variables in industrialized countries that have major short-term impact on developing countries including growth rates, real interest rates and exchange rates.

This chapter examines the role of credit relations and of the private sector in resolving financial crises in emerging market economies. It suggests that the most relevant approach in keeping with an understanding of today's international capital markets is one that seeks to involve private creditors on as voluntary a basis as possible. This chapter considers the design of crisis resolution approaches in the context of the economic theory about sovereign lending. It also evaluates some prominent proposals for reform and describes the possible future composition of lending to emerging markets.

This chapter examines how countries employed activist fiscal policies in response to the sharp decline in global growth following the financial crisis of 2007. In particular, it provides an in-depth analysis of the timing, size, and composition of fiscal stimulus packages in advanced and emerging market economies as well as the issues related to their implementation. It first summarizes some of the empirical evidence on whether an expansionary fiscal policy response was appropriate. It then shows that public debts increased dramatically from 2008 to 2010, especially in advanced economies. The substantial rise in fiscal deficits and debt ratios was not caused primarily by the fiscal stimulus, but by a decline in government revenues and, to a lesser extent, government support to the financial sector. Although fiscal stimulus packages varied across countries, these differences were generally consistent with each country's economic fundamentals, including available fiscal space, the severity of the downturn in domestic economic activity, the ability and space to use monetary policy, and the degree of trade openness that dilutes the effect of fiscal stimuli on the domestic economy.

This chapter examines the role of structural policies in International Monetary Fund (IMF) supported adjustment programs on financial crises in emerging market economies. Structural policies are those aimed at reducing or dismantling government-imposed distortions such as trade liberalization, disclosure policies and privatization policies. This chapter also summarizes the main concerns and criticisms that have been expressed about the IMF's existing approach to structural policy conditionality.

This chapter explores the impact of advanced countries’ quantitative easing on emerging market economies (EMEs) and how macroprudential policy and good governance play a role in preventing potential financial vulnerabilities. We use confidential locational bank statistics data from the Bank for International Settlements to examine whether quantitative easing has caused an appreciation of EMEs’ currencies and how it has done so, and whether this has in turn boosted foreign-currency borrowing, thus making EMEs vulnerable to balance sheet and maturity mismatch problems. While focusing our analysis on East Asian economies, we compare them with Latin American economies, which were also major recipients of quantitative easing capital inflows. We find that government effectiveness plays an important role in curbing excessive borrowing when the exchange rate is overvalued.

Although the Federal Reserve has stopped routinely intervening in the foreign-exchange market, other central banks have continued to do so. The Great Recession piqued interest in foreign-exchange operations especially among many emerging-market economies. In this epilogue, we describe five recent events that offer relevant counterpoints to the Federal Reserve’s history of foreign-exchange operations: Japan’s continued interest in intervention offers an interesting parallel to past US involvement. Switzerland provides acase study of the effectiveness of sterilized and nonsterilized interventions. China seems to systematically undervalue its currency, but the key lies in its central bank’scontinued ability to sterilize its interventions. We also briefly review intervention in developing and emerging market economies, and we discuss the re-emergent use of swap lines as a source of emergency liquidity.

This chapter provides an overview of prevention, reduction and management of the risk of financial and currency crises in emerging market economies. It discusses the lessons that can be learned from the crises of the 1970s to the 1990s and identifies strategies for reducing the risk of recurrent crises in emerging market economies. This chapter also analyzes how potential future crises can be managed in a way that would reduce the adverse effects of dealing with those crises and that would discourages behavior that increases the risk of future crises.

This chapter examines the state of fiscal accounts in advanced and emerging market economies from the postwar period until the outburst of the 2007 financial crisis, revealing some early symptoms of fiscal profligacy that eventually degenerated into fiscal stress. In G7 countries, general government expenditures grew persistently, from 25 percent of GDP in 1950 to 40 percent in the early 1990s. Initially, increasing expenditures were paid for by increasing revenues, but these were eventually accommodated by wider deficits and growing debt. After reaching a postwar low of 35 percent of GDP in the mid-1970s, helped by a negative interest-rate growth differential, the debt-to-GDP ratio stood at 84 percent by the time the crisis erupted. The reduction in fiscal deficits in advanced economies just before the crisis reflected largely temporary factors: equity prices added about 1.5 percent of GDP to revenues in advanced G20 countries, while housing prices, at their peak prior to the crisis, improved revenues in several European Union countries by about 2 percent of GDP.

This chapter explores the effects of creating a corporate bond market in emerging market economies on the efficiency of capital allocation. It argues that creating a corporate bond market and decoupling the banking sector from public finances reduces the fragility of the banking sector and shields a greater proportion of corporations from the consequences of government debt crises. The formal model in Bolton and Freixas (2006) is also used to evaluate the effects of different types of policies, such as financial liberalization or the creation of a market for collateralized debt obligations on the efficient allocation of capital and the incidence of debt crises.

This chapter compares the process of building fiscal capacity in postcommunist Poland and Russia using two test cases provided by international finance. The first is the financial run on emerging market economies that struck Eastern Europe in 1998; the second is the bubble burst on a series of speculative Wall Street investment ventures that occurred ten years later. The chapter begins with an overview of fiscal trends in 1990–1998 before turning to the impact of the financial crisis on Poland and Russia. It shows that Poland was able to strengthen its fiscal capacity in 1998 by expanding the revenue base, whereas the Russian state succumbed to fiscal collapse. In 2008, the fiscal capacity of the Polish state again proved resilient. Although the Russian economy was badly shaken by the crisis, state fiscal capacity was able to withstand financial collapse.

In the backdrop of economic trends during 2000–6, this chapter gives a synoptic account of the global economic developments during 2007–13. This seven-year period 2007–13 witnessed various crises—the sub-prime crisis in the US, leading to global financial crisis, finally culminating in the great recession of 2009. Countries all across the world undertook simultaneously coordinated monetary and fiscal stimulus, and growth resurfaced in 2010 led by a number of countries in developing Asia (primarily China). But this resurgence of growth was transitory, uneven, and fragile and the recovery was punctured subsequently in 2011–12 with the emergence of euro area debt crisis. A number of reasons may be identified behind the emergence of the euro area crisis, such as unsustainable fiscal position and high current account deficit in some of these economies. There are indications that 2014 will witness some improvements in the euro area.

This chapter proposes the creation of a synthetic unit of account in which claims on a diversified group of emerging-market economies can be denominated, together with steps by the international financial institutions to develop a liquid market in claims denominated in this unit. As this new unit conquers space in the global portfolio, it will become possible for emerging-market borrowers to issue claims denominated in the underlying currencies and to place them on international markets. The result will be a more efficient international diversification of risks and a reduction in financial fragility. The World Bank has attempted to promote the development of insurance markets for terms-of-trade risk. The chapter's proposal is one more attempt, in this spirit, to help to complete incomplete financial markets.

This chapter examines the extent to which large public debts will adversely affect investment, productivity, and growth. Drawing on data from a panel of advanced and emerging market economies in the period from 1970 to 2008, it shows that initial debt is inversely related to subsequent growth, controlling for other determinants of growth. On average, a 10 percentage point increase in the initial debt-to-GDP ratio is associated over the medium to long run with a slowdown in real per capita GDP growth of approximately 0.2 percentage points per year, with the impact somewhat smaller in advanced economies than in emerging market economies. Some evidence indicates nonlinearity, with higher levels of initial debt having a proportionately larger negative effect on subsequent growth. Moreover, when a country's economic and financial position vis-à-vis the rest of the world is weak or the share of its foreign currency-denominated debt is large, the adverse impact of initial public debt on subsequent growth tends to be much more pronounced than when these factors are at more moderate levels.

This chapter provides an overview of the macroeconomic environment since 2000. The era is broken down into three periods: 2000–2006, 2007–2010, and 2011–present. Warnings of an imminent crisis were present before 2007, but generally they were ignored by self-satisfied policymakers. Pre-crisis, inflation control was the once rising and, seemingly, preeminent monetary policy strategy. A review, both pre- and post-GFC, of a wide variety of macroeconomic and financial indicators is included, with discussion of lesser known variables such as proxies for central bank communication and balance sheet indicators. These clearly enable us to identify interventions by central banks while also highlighting areas of continuing concern. In some respects (e.g. concerns about financial stability), everything has changed post-crisis, but in other respects (e.g. monetary policy strategy) fewer changes are apparent. The chapter concludes by arguing that there are reasons to be apprehensive about the current state of monetary policy and central banking.

this chapter discusses what the author calls the balance of payments dominance on macroeconomic policy, defined as a macroeconomic regime in which short-term dynamics is largely determined by external, mainly financial, shocks. Typically emerging market economies suffer from this dominance and are prone to boom-and-bust cycles led by external financial shocks.

Chapter nine broadens the scope of country comparison beyond the EU context and engages in international comparison of postal reform. Particular emphasis is put on the varying reform record in liberal market economies (LMEs), contrasting LME postal reform leaders and LME postal reform laggards. While New Zealand and Australia have taken the lead of the international postal reform movement, the situation in the United States and Canada has for a considerable period of time been characterised by reform deadlock. Interesting insights can furthermore be drawn from the contrasting reform experience in Asia, comparing change in the coordinated market economy (CME) in Japan and the state-led market economy (SME) in Singapore. The chapter rounds up with a section on postal reform in emerging market economies in the Latin American context, which illustrates that the reform recipes developed in mature market economies may not apply in a different context.

This chapter touches on the progress and prospects for financial and macroeconomic policy coordination. There has been progress in the area of international financial stability, particularly in the design of the reform measures among the standard setting bodies (FSB, Basel, IOSCO). The chapter cautions however against national strategies that are independent of global arrangements, as these may result in more fragmented markets and would represent a retreat from globalization. In the area of macroeconomic policy, there have been efforts at cooperation and collaboration among emerging market economies (EMEs), but little progress has been made between the advanced economies and the EMEs.