International capital flows.

Position:Conference organized by the National Bureau of Economic Research

On October 17 and 18, 1997 leading academics, policymakers, and business people gathered in Woodstock, Vermont to discuss the growing importance of international capital flows to the world economy. For this conference, organized by NBER President Martin Feldstein, also of Harvard University, a number of academics prepared background papers, while the policymakers and business people presented their views on recent developments related to the nature and scope of international capital flows. The conference coincided with major developments in the Asian financial crisis, providing further stimulus to this meeting of academics and practitioners. The eight sessions were organized around the nature of capital flows in different parts of the world, the varying character of these flows, and the macroeconomic and regulatory challenges presented by these flows.

In the first session on capital flows to Latin America, Francisco Gil Diaz, Deputy Governor of the Bank of Mexico, reviewed the experience of Mexico since its financial crisis of late 1994, and suggested that the management of that crisis provided lessons for other crises that develop. He pointed to a number of factors that preceded both the Mexican crisis and the Asian crises, for example, including: rapid private credit expansion of limited quality; financial sector weakness with limited supervision; rapidly increasing asset prices; and the shortening of the liability structure. Gil Diaz emphasized the link between the exchange rate regime and the character of the flows both before and after the crisis: prior to the crisis, Mexico maintained a quasi-fixed exchange rate regime with bands that behaved like a fixed exchange rate regime, he asserted. But the discipline of a currency board was lacking, and massive short-term flows were attracted. Finally, Gil Diaz noted that the fiscal adjustments and benevolent international economic environment were also crucial to the resolution of the Mexican crisis.

Arminio Fraga of Soros Capital Management then reviewed the experience of a variety of Latin American countries and arrived at several conclusions about what conditions provided for market opportunities for speculators. First, Fraga noted that rapid increases in short-term debt and financial sector weakness were the most important indicators of market opportunities. Along with these factors, the persistence of governments in following unsustainable policies, the willingness of investors to believe...

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