- Garry Schinasi
- Published Date:
- January 2006
The IMF launched the Economic Issues series in 1996 to make the IMF staff’s research findings accessible to the public. Economic Issues are short, nontechnical monographs on topical issues written for the nonspecialist reader. They are published in six languages—English, Arabic, Chinese, French, Russian, and Spanish. Economic Issue No. 36, like the others in the series, reflects the opinions of its authors, which are not necessarily those of the IMF.
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Over the past three decades, financial markets have undergone a radical transformation and rapid expansion, driven by deregulation, liberalization, and globalization and advances in information and computer technologies. Cross-border capital flows have surged, markets have developed sophisticated new financial instruments, and the ease and speed with which financial transactions can be carried out have increased dramatically.
Although these changes have been beneficial overall, resulting in the more efficient distribution of capital, they have been accompanied by frequent financial disruptions—for example, the sharp price movements in U.S. equity markets in 1987 (“black Monday”) and 1997; bond market turbulence in the G-10 countries in 1994 and in the United States in 1996; currency crises in Mexico (1994–95), Asia (1997), and Russia (1998); the collapse of the hedge fund Long-Term Capital Management in 1998; the currency swings of the 1990s; and the volatility of global equity markets in 2000 and 2001. Some of these episodes threatened not only national and regional economies but also the global economy, highlighting the importance of making financial stability an economic policy objective in its own right. But they also demonstrated how poorly understood is the potential of globalized finance for mispricing and misallocating capital and causing financial turbulence.
The international financial system has grown so complex that it has become increasingly challenging—and costly—for policymakers to identify and assess risks. What is needed is a framework that gives clearer, earlier warnings of weaknesses. The framework presented in this economic issue is not meant to be a detailed, definitive blueprint but, rather, a starting point for further work and wider debate.
Economic Issue No. 36, prepared by Charles Gardner and Asimina Caminis, is based on several IMF Working Papers—WP/04/187, “Defining Financial Stability” and WP/04/120, “Private Finance and Public Policy,” both by Garry J. Schinasi; and WP/04/101, “Toward a Framework for Safeguarding Financial Stability,” by Aerdt Houben, Jan Kakes, and Garry J. Schinasi. They are available free of charge at www.imf.org/pubs. Mr. Schinasi is the author of the book Safeguarding Financial Stability: Theory and Practice, which will be published by the IMF in December 2005.