Volatility and crises: three lessons for developing countries

The recent international crisis has not invalidated previously acquired knowledge about the origins and remedies for economic crises. On the contrary, it has confirmed it. This article describes three long-standing lessons, confirmed by the latest international crisis. First, domestic policies and institutions—not globalization—are the main determinants of excessive volatility and economic crises. Second, free or subsidized risk insurance and the practice of “bailouts” for failing banks and companies are at the root of the worst crises. And third, the flexibility to adjust to new conditions—encouraged by a light and efficient regulatory framework—is the best antidote to macroeconomic disasters. (Audio: Department of Economic Publications)