A Review of Financial Stability Instruments for Emerging Market Economies

Graduating from their checkered histories of financial instability and debt-related problems is a key policy objective in many emerging market economies. The global financial turmoil that erupted in 2008 underscores the importance of this issue once again. This article maps out some of the key factors that contribute to this challenge, and then uses this map to develop a possible taxonomy for the array of proposed (and some already existing) policy instruments designed to respond to them. By relating each instrument to the particular aspect(s) of the broader policy challenge, the taxonomy helps to clarify some of the differences, similarities, as well as the potential value-added of these instruments. The analysis herein suggests that instruments that could help increase the efficiency of risk management strategies (such as growth- or GDP-indexed bonds) and enhance the effectiveness of debt management, growth and development policies (such as a stability and social investment facility or SIF) deserve further consideration in order to promote more sustained financial stability and enhanced debt tolerance in the emerging markets.