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Copenhagen Consensus Center

Copenhagen Consensus: Financial Instability Assessment, Eichengreen

Assessment Paper

An Assessment Paper on Financial Instability was prepared for the 2004 Copenhagen Consensus by Barry Eichengreen. The working paper used by the Expert Panel is available for download here, the finalized paper has been published in Global Crises, Global Solutions by Cambridge University Press.

Short Summary

Financial instability can have significant effects on economic growth. A round estimate is that income growth in developing countries has been reduced by a quarter over the last 25 years due to its effects. Financial instability can manifest itself as a sudden and large change in exchange rates, sharply rising interest rates, large numbers of debtors being unable to meet their obligations – or a combination of these symptoms.

It afflicts primarily countries in the process of economic development, which are vulnerable to instability and unable to cope with the consequences as smoothly as more economically advanced economies. In comparison, the poorest countries, which have very rudimentary financial markets, are effectively isolate from the problem. They are also isolated from the benefits of welldeveloped financial markets. Thus, while meeting the challenge of financial instability will benefit billions of relatively poor people, it will not so much benefit the very poorest, at least in the short run. However, as less developed countries grow and become more closely integrated into the global financial system, their welfare will be enhanced as well.