Private capital flows and speculative runs in emerging market economies

The level of capital market flows to emerging market economies constantly ascended during the 1990s. The favorite instruments during this era were portfolio investments, both bonds and equities. The downside of this financial globalization process was that it made emerging markets vulnerable to speculative runs. However, there is little evidence that speculators were the prime causal factors in precipitating these financial and currency crises. Sterilized intervention is the commonest defense measure that central banks adopt against speculative runs on currencies. Cautious, gradual and calculated financial market liberalization is another prudent defensive measure that monetary authorities need to take. The Latin American crisis of 1994–5 and the Asian financial crisis of 1997–8 have called into question the ability of the global financial system to manage transnational financial flows of such large dimensions. The paper casts light on various proposals to improve the present financial architecture.