The volatility machine : emerging economies and the threat of financial collapse /

Drawing on his experience as professional bond trader and on lessons learned from the history of sovereign external debt, and incorporating corporate finance theory, Pettis examines the causes and consequences of financial crisis in emerging economies. He maintains that international capital flows are driven primarily by external events, in particular the changing state of liquidity in major financial centers, and not by domestic politics and/or economic policies. According to Pettis, emerging market borrowers and investors have consistently underestimated the source and magnitude of volatility in emerging financial markets, and borrowers and investors have encouraged emerging economies to establish capital structures that exacerbate this volatility. Pettis proposes a policy approach for emerging economies that minimizes susceptibility to financial crisis and protects them from the effects of external liquidity shocks by properly managing risks associated with a country's external balance sheet. Pettis's analysis of, and insights into, the recurring sovereign debt problems merit consideration. The analysis suffers from two major shortcomings. It minimizes the contribution of flawed domestic economic policies to financial crises in emerging economies, and it fails to explain why some emerging economies have managed to avoid financial crisis at times when others did not. Also, the book could have used better proofreading. Public and academic library collections, undergraduate through faculty. C. J. Siegman formerly, Federal Reserve Board/International Monetary Fund