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This paper proposes an analytical framework that combines exogenous and endogenous risks, the latter stemming from frictions in financial markets. Arguing that endogenous risks may be systemic and costly, the paper employs a database of emerging market corporate bond spreads and finds evidence that endogenous risks are present and have amplified the effects of financial crises. Larger financial systems exacerbate the impact of crises, and weaker financial systems exacerbate particularly the impact of banking crises. The results suggest that policymakers should monitor time-varying systemic risks using both price and quantity signals and take actions in good times to mitigate potential amplifying effects at times of stress.
After decades using monetary aggregates as the main instrument of monetary policy and having different varieties of crawling peg exchange rate regimes, Colombia adopted a full-fledged inflation-targeting (IT) regime in 1999, with inflation as the nominal anchor, a floating exchange rate, and the short-term interest rate as the main instrument. This paper examines the experience of the Colombian Ce ... (View publication)
Financial liberalization has not lived up to expectations, at least as far as interest rate spreads are concerned. Over the past decade, many countries in Latin America and the Caribbean have reformed their financial sectors and reaped major economic benefits as a result. However, the persistence of high interest rate spreads -the difference between the interest charged to borrowers and the rate p ... (View publication)
Monetary normalization may be a chronicle foretold, but countries still have the power to influence the outcome for their own economies. This report focuses on the risks Latin American and Caribbean countries face and how they can reduce vulnerabilities and enhance opportunities. (View publication)
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