Globalization, Crisis Contagion and the Reform of the International Financial Architecture

The process of globalization has integrated financial markets and cross-border capital flows. This has resulted in the hyper mobility of capital and increased the vulnerability of nations to speculative attacks on their currencies. Capital flows deliver benefits in a first-best world. However, in a second-best world capital controls can reduce the welfare losses due to information asymmetry and other distortions. The speed and sequencing of capital account liberalization are critical to minimize the exposure of an economy to currency crises. Various types of currency crises and resulting contagion and its regional nature have been reviewed. Crisis contagion poses a systemic threat to the stability of the global financial system. Therefore the reform of the international financial architecture in order to minimize the occurrence of crises and crises contagion is matter of utmost importance. The role of the key players in the arena of global capital flows and the proposals for redesigning the international financial architecture are critically reviewed.