Exam 3 - 12:30 FOREIGNSAVINGS...

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12:30 FOREIGN SAVINGS External Commercial Borrowing-financial crisis Severe economic and financial crises have sometimes been associated with external  borrowing. GDP often feel substantially, but rebounded fairly quickly These crises were associated with rapid swings in capital flows especially in external  commercial borrowing. Causes? o 1) New financial liberalization-example: removing/weakening restriction on interest rates  and mandated lending targets, on bank entry. As seen before, deeper financial system (liberalized) promotes faster growth but is  more vulnerable to crisis. Some argue that in these countries, proper regulations and capacity to enforce them  well were not fully in place. o 2) Fast growth of some sort (often) this perhaps led to “bubble”-like optimism about the economy in general or the bubble  market, example: real estate. Too rapid acceleration in lending o 3) Short-term, dollar-denominated debt (rational)  creditor panics  (analogous to bank  run) rushes to recover loans, and does not make new ones (instead of rolling over the  debt, as is common) widespread shutdown of external commercial borrowing loss of capital flows leads to drastically reduced investment, lower growth, perhaps  liquidation of assets at firesale prices to repay debts. Lessons from crisis? (Controversial) o 1) Gradual rather than rapid financial liberalization-allow transition period for banking  sector and regulators o 2) Regulate or tax short-term capital flows long-term capital (loans or FDI) not as subject to creditor runs, not as volatile
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o 3) International “lender of last resort”-to help countries through liquidity crises. IMF (International Monetary Fund) Official Foreign Savings (Foreign Aid) Foreign aid ( foreign assistance )=grant or subsidized load (at a  concessional , i.e below- market, interest rate) to promote economic development and welfare. Official development assistance (ODA) =aid by governments to  low and middle income  countries. Aid can be  bilateral -from one country to another, e.g USAID-or  multilateral -pooled from  multiple countries to another. Multilateral aid is often given through multilateral agencies o World Bank  (“the Bank”)- loans, grants, consulting, research, ect. For development goals  and projects. o The  International Monetary Fund , IMF (the “Fund”)- backstop financing in financial and/ or currency crises. o
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Exam 3 - 12:30 FOREIGNSAVINGS...

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