Measures for Financial Stability: Domestic Policy Requirements for Regeneration of International Capital Flows

The 1990s have been marked by a process of integration of emerging market economies with global capital and currency markets. Domestic financial markets have become much more liberalized and international linkages have also grown remarkably. A central feature of this process has been the increasingly free movement of capital across
national boundaries. To the extent that they take place in well functioning, competitive markets and respond to proper price signals, capital flows imply benefits in terms of more efficient provision of financial services and more efficient allocation of resources and risks. Such benefits translate over time into faster economic growth and higher employment than would otherwise be the case. However, associated with these developments is a heightened tendency for financial instability, which may manifest itself in increased volatility of capital flows, asset price misalignments and international contagion, and even sporadic crises. Both the frequency and severity of international financial crises seems to have been rising over the last decade. Financial crises have increasingly led to severe economic disruption, increase in unemployment and return to poverty for many in some emerging markets. Having regard to these an issue high on the agenda of policymakers throughout the world is the prevention of these crises and ensuring financial stability and a sustained recovery of investments in the emerging