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date: 14 December 2019

Abstract and Keywords

This chapter notes that the liberalization of the capital accounts of Latin American economies led to sharp surges and then reversals of capital flows, which posed both severe difficulties for macroeconomic management and led to very costly crises. It points out that emerging economies, frequently led by capital surges, penetrate into vulnerability zones, which is contrary to conventional economic views which capital flows provide discipline for governments to follow better macroeconomic policies. The vulnerabilities generated include: high external liabilities, with a large short-term share; significant current account deficits; appreciated exchange rates and currency mismatches; high prices of domestic financial assets and real estate; and sizable increases in money supply as counterpart of the accumulation of international reserves.

Keywords: financial markets, account liberalization, Latin America, capital flows, macroeconomic management

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