Volumen 10: External Vulnerability and Preventive Policies


Emerging market economies endure significant macroeconomic volatility. The large correlation between external factors, e.g., terms of trade and world interest rate shocks, and domestic macroeconomic volatility is highly suggestive of their key role, but it does not explain the mechanism through which they operate. The evidence hints at the presence of strong multiplier effects, of which financial mechanisms are leading candidates. Although a significant component of this macroeconomic volatility is exogenous to emerging markets, it does not mean that domestic policy is secondary. Quite the opposite: facing large volatility makes good domestic policy decisions all the more important.

This volume is an attempt to characterize the main external shocks affecting emerging market economies, the sources of structural weaknesses, and the best policy frameworks for dealing with these problems. The main policy lessons are derived from a balanced combination of actual experiences documented through case and cross-country studies, and from normative analyses.

Editado por: Ricardo J. Caballero, César Calderón, Luis Felipe Céspedes..




This outstanding volume addresses the number one policy problem for emerging markets. We need to know whether domestic and international financial markets amplify the volatility of output and consumption in these economies. If so, what is the nature of the market failure that transforms external shocks into economic disasters? Can the accumulation of international reserves—the de facto policy response in recent years—improve economic performance? Finally, can the cost of this protection be reduced through less traditional approaches to asset and liability management? As with any good research effort, there is substantial dispersion of views about the answers to these questions. The Central Bank of Chile deserves high marks for supporting this research and in sharing the lively debate set out in this volume.

Michael P. Dooley. University of California at Santa Cruz

Emerging markets have experienced substantial fluctuations in external capital flows in the past few years. This volume contains a rich set of studies on the important issues of how countries develop vulnerabilities to these fluctuations and what policies they can adopt to minimize their adverse effects. It should be of great interest to policy makers in emerging market countries, academics, as well as private sector economists.

Raghuram G. Rajan. Economic Counselor and Director of Research International Monetary Fund

Latin America is buffeted by large and persistent external shocks. Such external volatility makes the domestic policy response especially important. This volume analyzes the effectiveness of some old policies and proposes some new ones. It does so with theoretical and empirical rigor, but never losing sight of realities on the ground. A key proposition emerges: to reduce vulnerability, the time may have come for qualified governments and central banks to buy and issue a wider range of securities, including domestic-currency denominated and GDP- and commodity-linked bonds.

Andrés Velasco. Harvard University