Policy to deal with 'sudden stop'
What is it about?
Sudden stop of capital flows can have large economic costs. Foreign exchange reserves are a standard solution to the problem. However, there is a large and persistent cost of such reserves. A more economical safeguard is an international credit line. The chapter in the edited volume takes a close look at such a safeguard.
Why is it important?
After the East Asian Financial Crisis of 1997-98, there has been considerable emphasis on capital controls. However, international credit lines (and Pigouvian tax-subsidy schemes) can reduce, if not obviate, the need for such capital controls.
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