Taming Financial Shocks: How to Manage Boom and Bust

International capital markets have grown dramatically since the mid-1960s. Although international capital movements partly reflect expanding economies, increasing world trade and the globalization of production, they also involve purely financial factors that rose notably faster, particularly since the 1990s. In the 1960s, the growing presence of unregulated international offshore financial centers stimulated capital movements by evading national financial regulations, capital controls and taxes. Then, in the 1970s and 1980s, many countries began to deregulate their domestic financial sectors and to relax or eliminate the regulation of foreign exchange transactions (Díaz-Alejandro, 1985; Devlin, 1989; Eichengreen, 2003). This, together with the revolutionary innovations that have taken place in data-management and telecommunications technology, and the emergence of increasingly sophisticated financial techniques, contributed to a boom in international financial flows. Generally, the financial boom occurred in a framework of lax or incomplete regulations and supervision, and in which existing regulations were in fact pro-cyclical (Griffith-Jones, 2001; Ocampo, 2002; United Nations, 1999; Turner, 2000). Indeed, there is a significant shortage of macroeconomic and financial governance in the present stage of unbalanced globalization.