The Volatility Machine

They occur instead for two other, related, reasons. First, emerging market borrowers and investors have consistently underestimated the source and magnitude of volatility in emerging financial markets. Second, perhaps as a consequence, borrowers and investors have permitted and even encouraged sovereigns to put into place capital structures that sy

And as was the case during the Mexican crisis, it required a major lender to provide a liquidity facility to end the vicious circle of liquidating assets, plunging collateral value, and more forced liquidations.

it does so when the borrower is best able to handle the higher cost.

I will distinguish between economic policy and the transmission of volatility, and I will argue that policy-making must be constructed in an environment in which excess volatility is kept to a minimum.

It is the structure and behavior of market players that systematically undermines the market, not changes in fundamentals. These only set off the crisis.

It is enough to summarize the key liquidity events that preceded the booms.

The second, less obvious, way is to reduce directly the mismatch between revenues and expenses by lining up debt servicing costs with operating revenues.

The Eurodollar market was the name given to the market surrounding the dollar accumulation in the banking system outside the United States during the “dollar glut” period of low U.S. interest rates in the 1960s.

Rather it is to address directly the instability that is introduced through the mismatched capital structure.