International Reserves and Swap Lines in Times of Financial Distress

This chapter reviews the use of precautionary measures aimed at mitigating emerging markets' exposure to fragility associated with financial integration. The chapter outlines the debate about desirable adjustment of Emerging markets during the first phase of the on-going crisis. It also discusses the experience of the Republic of Korea - a prime example of a country that opted for deeper financial integration in aftermath of the 1997-8 crisis, buffered with large hoarding of international reserves. The chapter suggests as one of a possible way to alleviate sudden stops and deleveraging pressure to use a Pigovian tax-cum-subsidy scheme. The discussion draws possible lessons from the ongoing global liquidity crisis.