world finance

world finance

The Importance of Global Financial Stability

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1. The Role of World Finance in Global Stability

An all-encompassing feature of financial stability is a stable operation of the global financial system. The latter condition implies the absence of undesirable disruptions, the result of which can be changed expectations, changes in asset prices, and ultimately changes in interest rates. This is consistent with the definition provided in a study by the International Monetary Fund (IMF): global financial stability is a situation when the global financial system operates so effectively that no change in the system is perceived as significant by the market participants. Requirements for the stability of national economic systems, financial systems included, were addressed by several Soviet researchers. The initial reasoning of these researchers stemmed from the dynamic aspects of economic stability as defined by Keynes in his invaluable work, and Ludwig von Mises, who in his theory of money and credit paid very serious attention to changes in money and credit in the economy. The first theoretical works concerning fiscal-monetary interaction, i.e., applied to the economic system, came from the financial market. Monetary expansion contributes, for some time, to the growth of real GDP and employment, and thus to the increase of fiscal revenues, the timing of which comes right after the fiscal expansion.

The importance of global financial stability. The world economy as a whole is composed of a large number of individual national economies. The modern world is generally looked upon as an integrated entity, where national differences are blurred by the joint impact of factors that affect all the countries. Correspondingly, world finance has become a component of a single global finance, while national financial systems have become its integral parts. This book deals mainly with world finance in the global economy, which must be stable for the world economy as a whole to be stable. Global financial stability has become a vitally important factor in ensuring sustained world economic growth.

2. Challenges and Risks in the Global Financial System

The research done by the major central banks, as well as at the Bank for International Settlements and academia, suggested, however, that agents in the financial markets and institutions were prone to exhibit systemic underestimation and moral hazard, namely that sufficient personal influence would be guaranteed or that responsibilities are based on potential powers addressing assist adherents in the financial industry urging them to reduce risks and the consequences of unprepared decisions when developing when others should do so. Securities are free and focused, mindless formal decisions that eventually encouraged significant risks and vulnerability created by the financial models and markets. Thus, the financial system, as well as combinations of legal, incentive, and institutional policies, pronounced concerns about insignificance. The semi-permeability of market contagion is always a potential obstacle to market stability. Markets expand from agency problems resulting from the game that exists, counterparty-risk inability to enforce to guide random privacy when the reputation threat that the Kuiper pocket rating can count. While understanding the adverse involvement and risk-coherent interests, the minority-owner equity portfolio value is restricted to high endogenous behavior, such as counterparty risk and margin lending to charters.

The financial and economic crises since 2000 have been a stark reminder that crises and the associated adjustment processes are inherent to the market-driven global economy. These crises have drawn attention to several weaknesses and gaps in the regulatory and market system, including difficult international macroeconomic imbalances, excessive growth of financial centers and developing vulnerabilities in the global financial architecture, as well as possibly inappropriate feedback mechanisms contributed to a number of defects of individual financial institutions and markets in the global economy at large. Clearly, the fact that leads us cannot become a self-contained preferential risk and market oversight-designated balance between excessive risk-taking and inadequate reward.

3. Strategies for Promoting Financial Stability

Such advances, however, have now stalled, and the crisis showed the volatility and illiquidity of markets in even supposedly high-quality assets. Take the US repo market as an example. Prior to the crisis, one-third of the funding of the dealer sector apparently came from the sponsoring banks and two-thirds from a variety of other sectors of the economy. These other sectors included money market mutual funds, insurance companies, and pension funds. Such funding certainly had advantages. It was generally longer-term in nature (non-financial corporations, for instance, typically extended funds for terms of between one year and three years) and could be refinanced in the repo market. The repo markets allowed funds to be liquid, so money lent to the dealer sector could be reabsorbed readily whenever necessary. Since the crisis, questions have arisen about the stability of this form of funding, both within the US and more generally. Some of these concerns were raised quite soon after August 2007, when it became obvious that not only were balance sheets adversely affected by the fall in values of some assets that were used to back these operations, but also the seemingly liquid.

The importance of global financial stability and the effectiveness of national financial systems will continue to resonate with all concerned. Even after measures to stabilize the financial system and stimulate economic growth have borne fruit, at enormous cost, it is clear that we have not yet decided on the basis for constructing a more sustainable and resilient financial system. Decisions on such matters must be taken at national and international levels, as well as on principles that are shaped and informed by the demands of genuine markets. They cannot simply be imposed as regulations. As we see, they can and will be circumvented if we do not have markets that enfranchise all parties. Many have called for a fundamental rethink of the regulatory framework for financial services. This is a complex issue, involving a large number of very challenging questions. On the regulatory side, one central issue concerns how to promote financial stability, especially in a market-based financial system where the traditional role of banking as the key credit intermediary has been reduced.

4. The Impact of Financial Stability on Economic Growth

There is also a consensus on the fact that global financial stability was considerably affected by the financial crisis in 2008. That more vulnerable and weaker structures compared to the strengthening after the crisis in 2010 will be faced with a series of problems. Particularly, ongoing concern on Greece, weak economic growth in Europe and the USA, the decrease in commodity prices such as oil that have influence on economies, the rise in interest rates of the FED by reference to the end of 2014, military tensions, and capital flow to emerging economies are among the macro-economic risks. Therefore, the importance of financial stability is highly needed to be comprehended, given the actual issues with economic growth these days. In this chapter, the global financial stability concept will be discussed along with its impacts on economic growth.

When considering financial stability, matters occupy a central position in the global economic system. In the light of economic theories and observations based on economic crises that have taken place at different levels and periods, there is a consensus on the need for solid economic growth. Fragile domestic economic conditions are a considerable threat not only for the relevant countries but also for the neighboring countries. Besides, the issue of economic growth is highly influential in reaching social welfare and reducing existing income inequality. In other words, economic growth has significant importance in terms of financial stability. There are various discussions in financial literature in this context. In summary, while some scholars argue that financial crises have a positive impact on financial stability in case of periodic destruction of inefficient firms and resources and formation of new and highly productive firms.

5. The Call for International Cooperation in Ensuring Financial Stability

From an economic point of view, the violence and spread of the recent financial crises should lead us to question the very raison d’être of financial markets, the way they behave, and the reasons why free market financial systems are supposed to be socially optimal. In the early 1950s, Galbraith wrote that “the study and analysis of the activities of the financial institutions do not rank highly among the major concerns of medieval theology. It is not, however, easy to derive much comfort from this. The financial institutions seem to be the intermediaries standing between the less well-informed and the forces of darkness. The more information that comes available about their function, the more one must fear”. This insightful quotation refers to the dark age that ended with the Great Depression of 1929, which opened the path for a radical change in institutional arrangements, especially in the United States. Crucial steps were taken at the international level with the Bretton Woods agreement, which established a system of fixed exchange rates but, more importantly, introduced two institutions that played a crucial role in the golden 30 years of capitalism (1945-1975).

The recent financial crises that hit the world in the first decade of the 21st century have forced us to re-examine the foundations of macroeconomics and finance. One of the main lessons that I have learned from these crises is that any study of these disciplines, which are both at the base of economics, has to start from the concept of financial instability. Including this dimension into the traditional economic models is essential for devising regulatory and macroeconomic policies that can limit the fallout of economic downturns, prevent them or at least limit the length and cost of financial crises.

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