more O and T ...and better still
"Our research suggests that financial development has played a major role in stimulating precautionary reserve accumulation in emerging markets. But we argue that the precaution is not to have a buffer against the inability of domestic residents to issue new external liabilities, the typical “sudden stop” argument. Rather, the buffer is also a safeguard against the sudden wish of domestic residents to acquire new external assets – that is, “sudden flight”"
flight of the compradors !!
"three crucial factors have forcefully coincided since 1990 to expose emerging markets to a much greater risk of crises that take the form of a classic “double drain” from bank deposits to cash, and then from cash to hard currency"
- A continuing desire to maintain a policy of fixed (or tightly managed) exchange rates, or a “fear of floating” whether to provide a transparent and credible nominal anchor, to boost trade or to avert destabilising balance sheet shocks when liabilities are dollarised.
- An ongoing trend, related to economic development, toward an increasingly monetised economy with a larger domestic banking and financial system relative to GDP
- A new inclination to shift policy so as to.......
LIBERALIZE external financial flows.
This liberalizing trend is complementary with a deepening of domestic financial markets"
that last point
ie
merging national financial markets into global capital flows
is the big new looming Gorilla
MORAL OF THE STORY
Southies listen up :
Under a managed exchange rate
ADD
CAPITAL MOBILITY !!!!!
and
", there is no space
for monetary policy autonomy."
NO SPACE !
" this applies to interest rate policy
and reserve cushions needed to weather banking crises"
