Mananging Financial Instability: Why Prudence is not Enough?

This paper argues that developing countries have limited arsenal at the national level to manage financial instability. The solutions have to be sought mainly at the multilateral level and these include: provision of adequate international liquidity at appropriate terms for current account financing to countries facing foreign exchange shortages as a result of trade and financial shocks; and orderly debt workout procedures designed to stem attacks on currencies, check capital outflows and involve the private sector in the resolution of crises. Multilateral policy surveillance and advice should also be used to help countries to manage surges in capital inflows.