Aizenman, JoshuaPinto, Brian2012-03-192012-03-192011-08-01https://hdl.handle.net/10986/3549The accumulated experience of emerging markets over the past two decades has laid bare the tenuous links between external financial integration and faster growth, on the one hand, and the proclivity of such integration to fuel costly crises on the other. These crises have not gone without learning. During the 1990s and 2000s, emerging markets converged to the middle ground of the policy space defined by the macroeconomic trilemma, with growing financial integration, controlled exchange rate flexibility, and proactive monetary policy. The OECD countries moved much faster toward financial integration, embracing financial liberalization, opting for a common currency in Europe, and for flexible exchange rates in other OECD countries. Following their crises of 1997-2001, emerging markets added financial stability as a goal, self-insured by building up international reserves, and adopted a public finance approach to financial integration. The global crisis of 2008-2009, which originated in the financial sector of advanced economies, meant that the OECD "overshot" the optimal degree of financial deregulation while the remarkable resilience of the emerging markets validated their public finance approach to financial integration. The story is not over: with capital flowing in droves to emerging markets once again, history could repeat itself without dynamic measures to manage capital mobility as part of a comprehensive prudential regulation effort.CC BY 3.0 IGOACCOUNTINGARBITRAGEBAILOUTBAILOUTSBALANCE OF PAYMENTSBALANCE SHEETBALANCE SHEETSBALANCE-OF-PAYMENTS CRISESBANK BRANCHESBANK DEBTBANK LENDINGBANK LOANSBANKING SYSTEMBONDBOND ISSUANCEBONDSBORROWING COSTSBUDGET CONSTRAINTBUSINESS CYCLECAPITAL ACCOUNTCAPITAL BASECAPITAL FLOWCAPITAL FLOWSCAPITAL FUNDSCAPITAL GAINSCAPITAL INFLOWSCAPITAL MOBILITYCAPITAL OUTFLOWSCAPITAL STOCKCENTRAL BANKCENTRAL BANK BILLSCENTRAL BANKSCOMMERCIAL BANKSCONTINGENT LIABILITIESCOUNTRY RISKCREDIBILITYCURRENCYCURRENCY BOARDSCURRENCY COMPOSITIONCURRENCY CRISESCURRENCY CRISISCURRENCY MISMATCHESCURRENT ACCOUNT DEFICITSCURRENT ACCOUNT SURPLUSCURRENT ACCOUNT SURPLUSESDEBTDEBT CRISISDEBT INSTRUMENTSDEBT OVERHANGDEPOSITDEPOSIT INSURANCEDEPOSITSDERIVATIVEDERIVATIVE CONTRACTSDERIVATIVESDEVELOPING COUNTRIESDEVELOPING COUNTRYDISCLOSURE REQUIREMENTSDOMESTIC BANKINGDOMESTIC BANKSDOMESTIC CAPITALDOMESTIC CURRENCYDOMESTIC INTEREST RATEEMERGING ECONOMIESEMERGING MARKETEMERGING MARKET COUNTRIESEMERGING MARKET COUNTRYEMERGING MARKET ECONOMIESEMERGING MARKETSEQUITY FLOWSEQUITY FUNDSEXCHANGE CONTROLSEXCHANGE RATEEXCHANGE RATE INSTABILITYEXPENDITUREEXPENDITURESEXTERNAL BORROWINGEXTERNAL BORROWINGSEXTERNAL COMMERCIAL BORROWINGFEDERAL RESERVEFEDERAL RESERVE BANKFINANCIAL ASSETFINANCIAL CRISESFINANCIAL CRISISFINANCIAL DEVELOPMENTFINANCIAL FLOWSFINANCIAL INSTABILITYFINANCIAL INSTITUTIONSFINANCIAL LIBERALIZATIONFINANCIAL OPENNESSFINANCIAL STABILITYFINANCIAL STRESSFINANCIAL SYSTEMFINANCIAL SYSTEMSFISCAL DEFICITSFISCAL POLICIESFISCAL POLICYFIXED EXCHANGE RATEFIXED EXCHANGE RATESFIXED INCOMEFIXED INCOME INVESTMENTFLEXIBLE EXCHANGE RATESFORECLOSUREFOREIGN BANKFOREIGN BANKSFOREIGN CAPITALFOREIGN CURRENCIESFOREIGN CURRENCYFOREIGN CURRENCY DEBTFOREIGN DIRECT INVESTMENTFOREIGN EQUITYFOREIGN EXCHANGEFOREIGN EXCHANGE RESERVESFOREIGN INFLOWSFOREIGN INVESTMENTFOREIGN INVESTORSFOREIGN PORTFOLIO INVESTMENTSFOREIGN PORTFOLIO INVESTORSFUTURESFUTURES MARKETGLOBAL ECONOMYGLOBALIZATIONGOVERNMENT DEBTHOLDINGHOLDINGSINCOME TAXINDEBTEDNESSINFLATIONARY EXPECTATIONSINSURANCEINSURANCE MARKETSINTEREST RATE CAPINTEREST RATE CAPSINTEREST RATESINTERNATIONAL BANKINTERNATIONAL CAPITALINTERNATIONAL CAPITAL MARKETSINTERNATIONAL ECONOMICSINTERNATIONAL FINANCEINTERNATIONAL FINANCIAL INTEGRATIONINTERNATIONAL TRADEINVENTORYINVESTMENT RATEINVESTMENT RATESLENDERLENDER OF LAST RESORTLEVYLIABILITYLIQUIDATIONLIQUIDITYLOANLOCAL BANKLOCAL CURRENCYMACROECONOMIC CRISESMACROECONOMIC CRISISMACROECONOMIC POLICIESMACROECONOMIC POLICYMACROECONOMIC RISKMARKET ACCESSMARKET CAPITALIZATIONMARKET INTEGRATIONMATURITIESMATURITYMONETARY FUNDMONETARY POLICYMORAL HAZARDMORTGAGENATIONAL INVESTMENTNATIONAL SAVINGNATIONAL SAVINGSOPEN ECONOMIESOPEN ECONOMYOPPORTUNITY COSTOUTPUT LOSSPENSIONPENSION FUNDSPERMANENT INCOME HYPOTHESISPOLITICAL ECONOMYPORTFOLIOPRICE RISKPRIVATE BANKSPRIVATE CAPITALPRIVATE EQUITYPRUDENTIAL REGULATIONPRUDENTIAL REGULATIONSPRUDENTIAL SUPERVISIONPUBLIC DEBTPUBLIC FINANCEPUBLIC FINANCESPUBLIC INVESTMENTSREAL EXCHANGE RATERESERVERESERVE REQUIREMENTRESERVE REQUIREMENTSRESERVESRETURNRETURNSRISK EXPOSURERISK NEUTRALSAFETY NETSSAVINGS RATESSETTLEMENTSHORT-TERM CAPITALSHORT-TERM DEBTSHORT-TERM EXTERNAL DEBTSOVEREIGN DEBTSOVEREIGN RISKSTOCK MARKETSTOCKSSWAPTAXTAX COLLECTIONTAX ON INTEREST INCOMETAX REGIMETAX TREATMENTTRANSACTIONTRANSPARENCYTREASURYTREASURY BILLTREATYVALUATIONWITHHOLDING TAXWorld Bank10.1596/1813-9450-5786