Daily Archives: October 14, 2008

By Maurice Obstfeld, Jay C. Shambaugh and Alan M. Taylor

Since the early 1990s, central banks in many emerging markets and developing countries have accumulated foreign reserves at an unprecedented rate. The macroeconomic impact of these official flows has been profound and they have contributed significantly to global imbalances. Providing an explanation for these trends remains a major puzzle in international macroeconomics, and prevailing theories based on trade or debt deliver poor empirical performance. We argue that part of this great reserve accumulation is a response to the threat of financial instability in the context of rapidly expanding financial systems, increasingly mobile capital, and exchange rate objectives. The recent turbulence in global financial markets supports this view. Read more

by Robert Wade

With headlines blaring that as much as £10bn of UK savings are at risk in the collapse of Iceland’s banking system, the question arises as to why the finance directors of UK companies, local government authorities, charities and police left their assets with Icelandic banks during the first half of 2008?  Why did they run the risks in return for an only slightly higher rate of interest?  The same can be asked of the finance directors of German, Danish and Dutch organizations which stand to lose from the Icelandic collapse. Why did their respective national financial regulators not rein them in? Read more