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Unformatted text preview: CHAPTER 21 INTERNATIONAL LENDING AND FINANCIAL CRISES Objectives of the Chapter International capital flows are sometimes courted, sometimes denigrated, and sometimes troublesome for the governments of the countries involved. This chapter focuses on portfolio lending, which is the transfer of financial assets (rather than foreign direct investment) between countries. After a welfare analysis of well-behaved international lending, an overview is offered of the post-WWII patterns of capital flows and financial crises. What we find in this chapter is that international lending can be very good when it goes well, and very bad when it goes awry. In both the 1980s and the 1990s, massive amounts of capital flowed from industrialized countries to emerging markets. During each of these decades, however, financial crises arose as some borrower countries found it difficult to service their external debt. The recurrent nature of these crises, and their tendency to spread to other countries, has highlighted the role that has been (and should be) played by international financial agencies such as the IMF. After studying Chapter 21 you should be able to 1. analyze the various types of international capital flows. 2. illustrate and explain the welfare effects of allowing free international lending and borrowing. 3. evaluate the case for taxing international capital flows. 4. evaluate the role of defective property rights in recurrent sovereign debt crises. 5. outline the causes and resolutions of financial crises. 6. evaluate proposals to prevent future financial crises, particularly capital controls and banking reform. Important Concepts Brady Plan: A method devised by the U.S. Treasury for resolving the 1980s debt crises. Bank borrowing of 18 debtor countries was restructured with some debt reduction and some repackaging of loans as Brady bonds. Conditionality: The strings attached by the International Monetary Fund to loans it makes to a country in financial crisis; these are intended to address and correct the fundamental problems that caused the crisis. Such strings include fiscal and monetary restraint and liberalization of the countrys domestic and international markets....
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- Fall '09
- International Economics