Liquidity vs. Efficiency in Liberalized International Financial Markets: a Warning to Developing Economies

Abstract

Until 1973 the postwar international payments system was, in large measure, shaped by Keynes’s thesis that flexible exchange rates and free international capital mobility are incompatible with global full employment and rapid economic growth in an era of multilateral free trade (Felix, 1977-8). This resulted in a stable international monetary system that permitted the global economy to experience unparalleled economic growth and prosperity despite widespread capital controls and international financial market regulations. Since 1973, the financial system has grown progressively more fragile with recurrent and increasingly stressful international debt and currency liquidity crises threatening the stability of the global economy.