Abstract: In the 1980s and 1990s, many countries opened their capital accounts and liberalized their domestic financial markets as part of the wave of liberalization that characterized the period. In 1997 the IMF even proposed changing its charter to include a mandate to promote capital market liberalization. At the time, many other economists warned that open capital accounts would lead to volatility and increased risk without contributing to growth or stability. Yet there was virtually no body of material or survey of literature that could provide the background for the debate on this issue. This book — which brings together some of the leading researchers and practitioners from around the world — attempts to fill that gap and goes a step further by providing alternative policy options to enhance macroeconomic management. The first chapter addresses the effects of capital market liberalization on developing countries in the presence of market failures and proposes policy interventions that allow developing countries to manage the risks associated with the volatility of capital flows. The rest of the book is organized around three major themes. The first part examines in detail the effects of capital market liberalization on developing countries. The second part analyses experiences with different types of capital account management — price-based and quantity-based regulations as well as other interventions in financial markets. The third part considers different forms of national and global financial regulations that may be used to manage the risks that capital flows generate on domestic financial systems.

Keywords: capital market liberalization, capital controls, financial markets, emerging markets, derivatives, financial regulation, IMF