On the international financial architecture

In spite of significant institutional and macroeconomic reforms over the last decade or two, capital flows to developing economies remain highly volatile. In 1996, net private capital flows to emerging markets reached US$230 billions; by 1997 these flows had been cut in half; by 1998 halved again; and after a mild recovery during 1999, flows fell in 2000 and 2001 to slightly over one-tenth the level of 1996. These reversals in capital flows have enormous economic and social costs for developing economies. For "well behaved" countries, a significant share of these fluctuations is triggered by events that are outside their direct control, and often outside the control of emerging markets as a whole. Building on this observation, this paper highlights some of the desirable features of insurance and hedging instruments against capital flow volatility, and discusses steps to facilitate the creation of these markets. Keywords: Capital Flows, Crises, Hedging, Insurance, Contingent Markets, Specialists, Contractible and Noncontractible Shocks, Collateralized Debt Obligations. JEL Classification: E0, E5, E6, F0, F3, G1, G2, O2.