The international financial crisis: Its nature and the economic policy challenges

This article discusses the origins of the international financial crisis, emphasizing the instability of the financial system as a leading cause. Although monetary policy in the early part of this decade may have helped to inflate the property bubble, it is far from having been the decisive factor. This article also argues that the function of controlling excessive asset price rises is one for regulatory policy rather than interest rates. What is proposed, accordingly, is the creation of institutional arrangements that facilitate the implementation of countercyclical financial policies during periods of strong economic growth. After considering the characteristics that economic policies in developed countries should adopt, the article then analyses the effects of the international crisis on the current accounts of the region’s countries and the difficulty of applying countercyclical policies in the absence of a global lender.