Capital Mobility, Exchange Rates and Economic Crises

Recent crises in emerging markets have raised doubts about the desirability of relaxing controls on capital mobility. George Fane, however, uses evidence from the crises in Asia and Latin America to reassert the traditional case that such controls are an excessively blunt instrument for achieving financial stability.This book argues that recent official proposals for reforming the 'international financial architecture' are also unlikely to reduce the frequency of currency and financial crises to an acceptable level. The author proposes an alternative plan to achieve greater financial stability:

banks should have to double the currently accepted percentage of capital to risk-weighted assets from 8 to 16 percent and the risk-weights for loans to emerging markets should also be raised substantiallythe financial sectors in emerging markets should be fully opened to foreign competitionbankruptcy procedures in emerging markets should be greatly strengthenedcentral banks should adopt flexible exchange rates, backed by credible targets for inflation or monetary growth. If flexible exchange rates are not adopted, central banks should at least avoid the widespread practice of trying to sterilise the monetary effects of capital flowsThe author argues that the implementation of this plan will be a far more effective way of enhancing financial stability than controlling international capital flows, or trying to force private lenders to make new loans to countries that suffer crises.

This book will be required reading for scholars and policymakers in the areas of international financial economics, financial regulation, development economics and Asian studies.