Financial crises are nothing new and they are due to an abrupt reversal of
capital flows. In general, there are two sets of theories to explain sudden
changes in capital flows. The first takes economic fundamentals as its sta
rting point, while the other explains the changes as being the result of se
lf-fulfilling prophecies. Both models provide insight into the financial cr
ises of recent years in Asia, Russia and Brazil, to which inadequate inform
ation and the flock mentality also contributed.
New measures should bring greater stability to the international financial
market, without detracting from its advantages. Measures that improve the e
conomic fundamentals of a country, provide improved access to information a
nd reduce the behavioural risk associated with bail-out programmes should h
ave the desired effect. Quantitative regulation of capital flows does not a
ddress the underlying causes of the crises.
The article concludes with a summary of current international work aimed at
improving the international financial system.