International financial markets play an important role in the economies of developing countries. They are used for attracting foreign investment and for financing economic development plans. However, the current crisis of international financial markets has eroded faith in the system.
Amongst the largest contributors to the current financial crisis are the USA, the United Kingdom and Germany. These three countries account for the bulk of global credit defaults.
The largest capital exporters are Luxembourg, Ireland and Netherlands. In contrast, the largest borrowers are the USA, France and Russia.
During the last decade, international trade has grown at an impressive rate. This growth has been fueled by advances in telecommunications, data processing and liberalization of cross-border capital flows. Consequently, many countries have opted for internationalization of their financial markets.
As a result, a number of studies have examined the linkages between international financial markets. They have been based on aggregated national data. Moreover, some studies have examined bilateral financial linkages between countries.
A prominent group of economists have analyzed the nature of capital flows, the roles of international financial institutions, and alternative exchange-rate regimes. They blend conceptual analysis with policy discussion in a set of well-integrated papers.
As a response to the recent financial crisis, some proposals have been put forward to regulate the flow of capital. Such a proposal is likely to have negative social and political consequences.
Some of these proposals include a reform of the governance structure of the IMF. Others have partyguise suggested a more stringent regulation of hedge funds. Both of these proposals would increase transparency and give supervisory authorities the chance to intervene.