The Confidence Game: Exit, Voice and Loyalty in Financial Markets

  • Javier Santiso
Part of the The CERI Series in International Relations and Political Economy book series (CERI)


At the very heart of financial transactions lies the question of confidence. Economists, from Smith to Coase, have underlined the importance of confidence, whether it be to explain the wealth of nations or the birth and death of firms. More recently, Paul Krugman highlighted how contemporary games of confidence and trust are at the center of financial turbulences. Given their financial needs and lack of savings, emerging markets are highly dependent on international capital flows. The game for policy-makers is thus to keep premiums low by maintaining investors’ confidence in their countries’ economy. It has been argued that in order to regain confidence some emerging countries should simply give up their political and monetary economy, abandoning the national currency. “The credibility of their financial policies, as argued, would be greatly enhanced by the implicit subordination to the policymaking institutions of the hard currency issues.”2 The central idea is that countries, like Argentina, could gain more confidence abroad by abandoning their national currencies as a vehicle for “institutions substitution,” paraphrasing the label of the “imports substitution” approach once dominant in Latin America and developing countries during the 1960s. Two leading economists from the MIT went further in this “substitution institution” strategy in order to boost confidence suggesting that Argentina should simply give up its monetary, fiscal, regulatory and management sovereignty for an extended period of at least five years.3


Financial Market Central Bank Latin American Country Hedge Fund Fund Manager 
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© Javier Santiso 2003

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  • Javier Santiso

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