Once upon a time, economists saw capital account liberalization--the free and unrestricted flow of capital in and out of countries--as unambiguously good. Good for debtor states, good for the world economy. No longer. Spectacular banking and currency crises in recent decades have shattered the consensus. In this remarkably clear and pithy volume, o

Acknowledgments vii Introduction ix 1. Emerging Markets Crises and Policy Responses 1 The pre-crisis period 1 The crisis 7 IMF reforms, regulatory changes, and private sector innovations 18 2. The Economists' Views 23 Consensus view 23 Conflicting advice and the topsy-turvy principle 29 "Unrealistic" encroachments on sovereignty 36 Theories 36 3. Outline of the Argument and Main Message 47 The problem of a standard borrower 48 Why is external borrowing different? 48 Institutional and policy responses to market failure 50 4. Liquidity and Risk-Management in a Closed Economy 53 Corporate financing: key organizing principles 53 Domestic liquidity provision 70 5. Identification of Market Failure: Are Debtor Countries Ordinary Borrowers? 77 The analogy and a few potential differences 77 A dual-agency perspective 81 The government's incentives 86 Discussion 88 A common-agency perspective 92 6. Implications of the Dual- and Common-Agency Perspectives 97 Implication 1: the representation hypothesis 97 Implication 2: policy analysis 102 Cross-country comparisons 108 Is there a need for an international lender of last resort? 110 7. Institutional Implications: What Role for the IMF? 113 From market failure to mission design 113 Governance 116 8. Conclusion 129 References 131 Index 145

Jean Tirole, Winner of the 2014 Nobel Prize in Economics "An insightful contribution to the expanding economics research that reexamines the role of the International Monetary Fund in emerging markets and financial crises."--Choice

"In this remarkably ambitious and insightful book, Jean Tirole tackles the core issues in the economics of international lending with his usual superb clarity of thought. This book is essential reading to anyone interested in understanding the economics behind the recent drive to improve the international financial architecture."—Ken Rogoff, Chief Economist and Director of Research, International Monetary Fund"Jean Tirole is living proof of the value of good economic thinking. He shines new light on, and dissipates heat from, every issue he touches. In this book he offers us an amazing combination of detailed facts and rigorous theory about international financial crises. His perspective of dual and common agencies enriches our understanding of the roles and shortcomings of international economic institutions, and points the way to reform. All the supposed experts who engage in controversies on these matters should learn from this book."—Avinash Dixit, Princeton University"This book presents one of the first comprehensive attempts to bring rigorous theoretical foundations into the debate on the international financial architecture. The analysis is simple, elegant, and yields insights that are often unconventional and always thought-provoking. This is an indispensable reference for all economists interested in the current debates on the international financial architecture."—Olivier Jeanne, International Monetary Fund"Most proposals for reforming the international financial system derive from ad hoc explanations for recent crises. Jean Tirole goes back to first principles. He asks how relations between lenders and borrowers differ in the international context from those in the domestic context. You may not agree with all of his conclusions but will have to rethink your own views after you have read it."—Peter B. Kenen, Princeton University"Jean Tirole uses the tools of corporate finance to analyse some key aspects of international finance. As we expect from him, we get deep and fruitful insights into issues such as borrower and lender behavior, the appropriate role of the IMF, and private sector involvement in orderly workouts. This is essential reading for all those concerned with the 'international financial architecture.'"—Richard Portes, London Business School