Country Insurance: The Role of Domestic Policies

Abstract

Estimation of Probability of Sudden Stop 31 v PrefaceCountries face a range of shocks that can contribute to higher volatility in aggregate output and, in extreme cases, to economic crises.The presence of such risks underlies a potential demand for mechanisms to soften the blow from adverse economic shocks.Such a protective infrastructure is referred to in this paper as "country insurance."Protective measures that countries can take themselves ("self-insurance") include sound economic policies, robust financial structures, and adequate reserve coverage.Beyond self-insurance, countries have also established regional arrangements that pool risks while, at the multilateral level, the IMF plays a central role through the temporary provision of its resources when shocks create balance of payments difficulties for a member, and through the policy advice it provides under surveillance.This Occasional Paper focuses on what countries can do on their own-that is, on the role of domestic policies-with respect to country insurance.

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