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International Monetary Fund. European Dept.

Abstract

Though Europe has made great strides in financial innovation and integration, many advanced European economies still need to level the playing field for the various forms of financial intermediation. Competitive and more diversified financial systems are better at distributing risk and identifying and supporting industries with high growth potential. These systems allow the complementarities of bank- and market-based financing to be fully exploited. At the same time, as the recent financial market turbulence underscores, both private and public prudential frameworks need to keep up with financial innovation if the benefits are to be reaped without incurring excessive risks. To secure the resilience of financial systems in advanced economies, it will be important to improve the management of market and liquidity risk, implement more advanced risk assessment models, and increase transparency of underwriting standards and counterparty risk exposures.

International Monetary Fund. European Dept.

Abstract

Income convergence in emerging Europe has been accompanied by rapid financial deepening. Financial intermediaries have played a primary role in channeling capital flows into the region, benefiting consumers, producers, and investors alike. But the resulting high speed of convergence is engendering short-term risks and medium-term challenges. To ensure “safe driving” at considerable speed, and thus smooth convergence, policymakers will need to adopt a cautious approach. Faced with the uncertainties involved, reducing vulnerabilities and building buffers will be essential. Where convergence has been associated with large external imbalances, the challenge is to “prepare for the curve ahead,” which is to turn around these imbalances without painful adjustment. This will require that resources flow without hindrance to productive investments, particularly in the tradables sector. Policymakers will need to strengthen their financial systems and raise the flexibility of labor and capital markets.

International Monetary Fund. European Dept.

Abstract

Financial development has advanced to varying degrees in emerging Europe. Macroeconomic stability and good institutional quality and law enforceability appear to have been key forces. Building on recent progress, further reforms are needed to complete the establishment of deep, liquid, diversified, and stable financial markets. This will yield benefits in terms of efficiency, risk diversification, and resilience in the face of possibly volatile external capital flows. Going forward, the EU integration process is likely to drive reforms in EU members. In non-EU emerging economies, the focus should be on reinforcing the foundations of financial development, including the rule of law, creating a well-functioning government securities market, establishing stronger corporate governance and creditor rights protection, and promoting a favorable environment for the emergence of institutional investors. Reforms need to be tailored to specific country circumstances as illustrated in the boxes presented in this chapter.

Mr. Charles Enoch and Mr. Tomás J. T. Baliño

Abstract

This paper provides a comprehensive analysis of the attractions and disadvantages of currency board arrangements in their various institutional configurations. It asks what defines a currency board arrangement, what are their strengths and weaknesses, and what constraints they place on macroeconomic policies. It also reviews country experiences with these arrangements.

International Monetary Fund. External Relations Dept.
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International Monetary Fund. External Relations Dept.
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