Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?
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Guillermo A Calvo (ed) The MIT Press: Cambridge, MA, 2005, 552pp.
The original Golden Age of financial globalization took place during 1870–1913, when private capital flew quite freely from London to the emerging markets of the day. Private capital mobility evaporated as a consequence of two world wars, the Great Depression in between, and the Cold War. During most of the 20th century, most financial capital entering developing countries came from official sources. Flows of private capital resumed around 1990.
In theory, global financial markets facilitate intertemporal trade and risk-sharing, and the welfare gains from North-South capital transfers are substantial. In practice, those welfare gains have not been fully realized. Capital flows, while large relative to earlier decades, have been quite small relative to the benchmark offered in a famous 1990 paper by Robert Lucas. More importantly, private capital flows to emerging markets (EMs) have proven to be highly volatile. Their...