1. Why are we obsessed with volatility and what have we done about it?
Ugo Panizza
Research Department
Inter-American Development Bank

2. Volatility is costly It leads to lower growth
Negative effect on productivity
Low investment in both physical and human capital
It increases inequality and poverty
It leads to smaller financial systems
In the absence of a well-working financial market, it leads to high volatility of consumption

3. Latin America is volatile

4. Why is Latin America volatile?
Large external shocks
Terms of trade
Sudden Stops in capital flows
Volatile macroeconomic policies
Monetary Policy
Fiscal Policy
Exchange Rate Policy
Political shocks

5. What can we do to reduce volatility? The 1995 Approach
DOMESTIC POLICIES CAN DO THE TRICK!!!
Policies aimed at reducing terms of trade risk
Export diversification
Stabilization funds
Policies aimed at reducing fiscal volatility
Budget institutions
Good debt management
Policies aimed at reducing excessive exchange rate volatility and misalignments
Managed floating

6. What can we do to reduce volatility? Lessons from the crises
The Asian and Russian crises of the late 1990s spread shockwaves throughout the whole emerging world, also affecting countries characterized by good policies
It became clear that good policies and institutions are NECESSARY but not SUFFICIENT conditions for isolating EM from external shocks

7. What can we do to reduce volatility? Lessons from the crises
Efforts to understanding the effects of the Asian and Russian crises and developing mechanisms to reduce volatility gave rise to two new complementary areas of research
The role of currency denomination of external debt (ORIGINAL SIN)
The role of SUDDEN STOPS in capital flows

8. What can we do to reduce volatility? Lessons from the crises
Research showed that these problems are partly due to the way in which the international capital markets work
Hence, they cannot be fully addressed with domestic policies
This led to proposals aimed at addressing what Calvo (2002) called GLOBALIZATION HAZARDS

9. What can we do to reduce volatility? Lessons from the crises
Emerging Markets Fund aimed at limiting contagion and generalized Sudden Stops in capital flows (Calvo, 2002)
Emerging Markets Index and IFI issues in EM currencies aimed at creating new markets and achieving redemption from Original Sin (Eichengreen and Hausmann, 2004)

10. Why are we obsessed with volatility and what have we done about it?
Ugo Panizza
Research Department
Inter-American Development Bank