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International Liquidity Management Problems in Modern Latin America: Their Origin and Policy Implications

International Liquidity Management Problems in Modern Latin America: Their Origin and Policy Implications

Chapter:
(p.207) 5 International Liquidity Management Problems in Modern Latin America: Their Origin and Policy Implications
Source:
Latin American Macroeconomic Reforms
Author(s):
Ricardo J. Caballero
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226302683.003.0007

Despite the significant economic and institutional progress experienced by the main economies of the region over the last decade or so, Latin America still experiences substantial macroeconomic instability. Replacing the chronic domestic imbalances of the past, much of this instability stems from the occasional but sharp tightening of a country's access to international financial markets. Facing this scenario, both the private and the public sectors are compelled to design an appropriate international liquidity management strategy. Unfortunately, although this is not a daunting task at the microeconomic level (i.e., given prices), there is still very limited understanding of its macroeconomic counterpart. This chapter attempts to shed some light on this issue, drawing from some of the author's recent theoretical and applied work in this area. It addresses three sequential questions: (1) Why is there a need for decentralized and centralized international liquidity management? (2) What are the types of structural and macroeconomic policies that a government should pursue, even if the private sector is using socially efficient prices in deciding its international liquidity position? (3) When and how should the government attempt to force the private sector to increase its international liquidity position?

Keywords:   macroeconomic instability, international liquidity management, macroeconomic policy

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