Financial Management Assignment Help
The answers beneath is based on the strategies that a central bank can adopt in the international monetary policy landscape. Students seeking Financial Management assignment help should find the material relevant. It elaborates how central banks have 3 main possibilities to manage the high volatility of capital flows. Financial Management assignment help solution goes on to explain in detail how the solution to the volatility of capital flows is a combination of quality macroeconomic, micro-prudential and macro prudential measures.
- Capital flow surges and reversals have become a feature of the international monetary landscape.
(a) Explain the reasons that help elaborate this pattern. As part of your answer, investigate the extent to which the pattern is consistent with the notion of efficient markets.
Given that the stock market is the core of the current economy, it means that the further development of the national economy depends, to a large extent, on the expansion of this sector. Indeed, between the stock market and the domestic economy is a direct dependent link. The capital flow surges and reversals have nowadays become an important characteristic of the international monetary area. This process is driven by many factors, some of that we will discuss in the next pages.
One of the main factors that explain the fact that capital flow financial management assignment help surges and reversals have become a feature of the international monetary landscape is globalization. The process of globalization has deepened the connections between most of the countries of the world. There are only a few exceptions; mostly between the remaining totalitarian regimes and the small island countries for which the physical contact with the rest of the world is quite difficult and expensive (because the population is small the airline or water connection are not easily affordable). Nowadays the commercial relations between the countries of the world are stronger, freer and more variable than in any moment of our history. The process of globalization did not stop to diminishing the customs. No, the promoters of freedom supported and partially obtained the instauration of open economies around the globe and the free circulation of capital.
Yes, we know that until now we have not obtained a totally help with financial management assignment free circulation of the capital around the globe. If we could obtain such a utopian thing the capital could move around the globe to the places where the highest economic yield could be obtained.
The reality is that, although we say that we have almost reached the final point of globalization, there are still high costs in the movement of some forms of capital. For example, the movement of human capital is difficult in most parts of the world, even in the US. The United States accept only a certain number of immigrants each year, although most economic theories financial management assignments help consider that a total freedom of movement would have as an effect the formation of a new equilibrium point (preferable for the producers). Supposedly the free movement of human capital is realized in the European Union, but even there are seven years probationary periods for the new members. When the inhabitants of the new members finally gain access to the EU labor market the difference between the wages are significantly smaller and the economical advantage is partially lost.
Another form of capital which is difficult to move is the technical one. Yes, in theory a producer can move his plants in any country of the world financial management assignment assistance (which allows the ownership of capital), but in reality the costs involved in opening a new plant (the degree of bureaucracy, the opposition of the homeland syndicates, the customs between that country and the market on which the entrepreneur sells its products, etc.) strongly affect the mobility of the capital.
The only form of capital that moves easily around the world is the financial one. And, further we will respond this question through its perspective. The movement of financial capital is as old as time itself. The history of our society is full with examples of kings which borrowed capitals to their neighbors or which financed some international cause. After that, the development of the financial framework increased the ease of capital movement. But the movement of financial capital has become a defining characteristic of the world economy only after the assistance with financial management assignment development of communication. We can surely say that the financial capital became really movable around the world in 1858 when the first Transatlantic Telegraph Cable was installed and ready to use.
The telegraph line between Europe and US allowed, for the first time, the bankers and capital owners to move their capitals to the places where the profit financial management assignment help margins were higher in real time. Of course, at that time it was not as easy as today to place your capital on the market with the highest interest rates but the first step was made. From that moment started an accelerated evolution of the financial world to the state in which it is today.
Nowadays, the movement of capital from a country to another country is far from being out of the ordinary. Capital owners, investment founds managers and others are ready at any time to place their capitals on the markets with interest rates which are higher than the world average (of course taking into account the losses that can occur due to the exchange rate between the currencies). From this point of view we could financial management assignment help consider that there are two types of capital: speculative and investment. The difference between them is mainly related help with financial management assignment to the time of the investments. The speculative capital is placed for a short time, the owners being ready at any time to move it in a country where the interest rate has grown. The profit margins are higher in this case but so are also the risks. The investment capital refers to a long term. The owner usually places his capital in safer investments, with longer maturity periods and lower profit margins.
Both these forms of capital can be a consistent inflow in a country, but the speculative one will more quickly outflow the country. Depending on his size the outflow of capital can be a problem for the macro-economic equilibrium o that country.
In my opinion the most efficient market is the one with free movement of all the forms of capital, although this situation could involve quick outflows or inflows of capital which would affect the stability of the country. I know that if only one country would allow this freedom and the rest of the world would use custom barriers the situation in the economy of that country would be far from the idea of efficiency. Probably the best scenario would be the one in which the process of globalization would be finished, and all the countries of the world would allow the free movement of capital. In this situation the general interest rate would tend to really small values which would discourage the speculative placement of capitals. The capital owners (financial, technical or human) will have the possibility to collaborate to form the most efficient mix of capital to obtain the best products and the highest profits.
Globalization is a general factor, one of the financial management assignment writing help most important which contributed to the liberalization of capital, but also to the surges and reversals of capital. However, beside it, an important role is played by the liberalization process of the capital markets. The surges in capital inflows can arise from ramped up money supply and liquidity in the developed economies. This was one of the after crisis effects.
The liberalization of markets was another essential factor with a high contribution to the movement of capital. In this moment the world is constituted from a known number of markets with different degrees of liberalization: from countries which don’t permit the movement of capital to countries which have an extremely high capital movement. It has been observed that the inclination to liberalization is higher for the democratic countries with a small public sector. The tendency to liberalization is decreasing for the countries with a large public sector or a totalitarian regime.
If all the countries of the world would be liberalized and would have a perfect capital movement then all the interest rates would equalize. If this objective of globalization would be attained then the capital will lose the interest rate as an incentive of movement and the flows of capital will be orientated to the best investment options. Capital owners will choose to orientate their capital to the investments with the best potential of growth and not to speculative actions. But, the reality is that not even in the case of the most liberalized countries the movement of capital is perfect.
There is a long way from the theoretical ideals to the realities of the real world. In the real world from the 1970 s when the liberalization of markets (from the capital movement point of view) begun great progresses have been obtained. The movement of capital is now freer than ever and can be done between more countries than ever. But, because the degree of liberalization differs the movement of capital between the countries of the world is financial management assignment help service affected by the level of the interest rates. The capitals will flow to the countries with the highest interest rates which allow the entrance of the capital.
Another factor, which is a more specific one, is represented by the financial contagion. The financial contagion of the financial markets is a phenomenon occurred due to instability or because of a financial shock (as the present crisis is). It can transmit faster where there are online financial management assignment help strong economic relations and interdependence between countries. Contagion refers to the spread turmoil from one country to another, a process observed especially by movements of the capital flows (surges and reversals), but also by changes in exchange rates and exchange traded assets’ values.
The problem of contagion in financial markets, an important financial management assignment help feature in times of economic downturn, is particularly important because of the consequences it may have on the global economy in terms of monetary policy, risk management and optimal allocation of resources. A country that is in poor fiscal conditions can trigger this effect in countries wherewith is in economic relations precisely because it does not take help with financial management assignment appropriate measures to fiscal consolidation. Causes of contagion can be divided conceptually into two categories. The first category emphasizes the side effects resulting from the normal interdependence of the market economies. This interdependence means that global or local shocks can be transmitted to other countries because of financial links. The second category involves a financial crisis which is not linked to the observed changes in macroeconomics, but is the result of the behavior of investors and other financial agents. Under this definition, contagion occurs when there are movements in the capital flows, even when global shocks are not present and interdependence is not a factor. A crisis in one country can, for example, lead investors to withdraw their investments in many markets without taking into account the differences of economic conditions.
This type of contagion is often caused by “irrational” phenomena financial management assignment assistance such as financial panic, herd behavior, loss of confidence and increased risk aversion. Contagion occurs because markets are not efficient, this means that there are arbitrage opportunities, the behavior of the actors on the market is not rational, and there is no available and free information on the market. In this context, a security price does not accurately and completely reflect all information about the issuer and investors may not consider the market price as fair value in the trading of securities.
One of the most prominent types of the financial contagion is represented by the so called “heard effect”. The heading behavior is an important conception financial management assignment solution of the behavioral finance and behavioral economics. However, even if the “true” contagion – the unanticipated transmission of the economic shocks – is often associated with the effect of “herd”, the latter is not a condition necessary for the conduct of the first phenomenon. To understand the herd behavior we will give an example. In September 2008, when Lehman Brothers declared its bankruptcy, the stock market indexes from Italy and Greece recorded a financial management assignment writing help maximum value, and other values were above average or very close to the maximum. This situation indicates that either the shock has not yet penetrated Europe (it was not yet experienced) or the investors for fear of what would happen to the American market have directed their resources to the European markets.
The capital market is one of the most mobile and the crisis definitely was affected the European system. In this case, the herd effect was the one which has dictated the capital movements. This heard effect has determined many investors to proceed in the same way. The rising demand in the market, or the capital surges, has led to an increase in the prices indices. The cost of obtaining and processing information could lead to herd behavior, even when investors are rational. Recent studies have focused on the fact that individuals tend to imitate others. In fact, economists believe that there is an extensive gregarious spirit among investors in financial markets. The existence of herd mentality of investors is a commonly used explanation for volatility earnings of the shares. Investors are considered as part of the heard if they are aware and are influenced by the actions of others. The potential of their earnings and the characteristics of risk have implications for price models and capitals flows migrations.
Here we must make a distinction between the herd behavior and the mass effect. The mass effect means that individuals make decisions in accordance with the expectations of the people around them. The mass effect is actually a behavior commonly found even in everyday life. This effect refers to situations in which individuals make decisions based on the beliefs that the majority of people around them have and which are often not in accordance to their beliefs. For the markets, this effect could have very serious consequences as a result of unconfirmed information (such as gossip or speculation) that can cause the prices to fluctuate very sharply or the capital to migrate in specific directions. Speculation, for example can determine surges in capital inflows in a country in a specific period of time and, when investor are directing in other locations (due to the same process of speculations), a reversal in the capitals flow. This process determines, in this manner, a mass migration of the capital flows. Herd behavior is similar to mass effect, but it puts more financial management assignment help emphasis financial management assignment help on the actions of individuals in a group. The main finding is that individuals are acting as a group. The effect is remarkable in periods of economic collapses or economic booms when investors, through their work, encourage economic bubble burst and capital migration.
From our perspective, the most important element in both conventional and behavior finance analysis is the notion of risk aversion, which is defined as the desire to avoid uncertainty, quantified mathematically by the expected value that the investor wants to minimize or to eliminate in order to obtain greater certainty. We can say that an individual has risk aversion if he is not willing to accept any investment for which the expected gain is zero. If the investor psychology would be the dominant factor in the market, the opposition between pessimistic and optimistic investors will be more often associated with the opposition between a stagnant market and a strong one. When investors are optimistic about the future evolution of a market or economy, they are more likely to invest in it, even in speculative bonds. This will make the bonds return to fall and, in the same time, to increase the market index. This situation will attract more capital inflows in the domestic economies. Otherwise, if the investors are pessimistic about the future state of the economy, they would not invest in that market or will retract their investment, fact that will cause a reversal in the capital flows.
The rationality attribute of investors and the efficient market hypothesis can be considered some faulty models which generated the 2007 financial crisis. Beside this, another one is the belief that the financial markets are self-regulating. The persistence and the deepening of the international financial crisis induced a revision and an improvement of supervision and regulation of financial markets. Some are inclined to consider the crisis as an help with financial management assignment inevitable accident, but not unusual, over the economic cycle, a result of the very low interest rates prevailing in the last years in the United States and Europe. The deepening of the crisis, however, had structural causes. The globalization of financial markets and of financial innovations, in terms of poor regulation (or lack of it), and the plethora of conflicts of interest created preconditions for the 2007 crisis. A heated debate was related to the regulatory framework of the capital market. Some economists come with a sensible argument, according to the logic of the single market and assistance with financial management assignment of the capital flows that disregard national borders. The fact that the capital market lacked of or had a poor regulation (in special in the domain of the derivates) created the opportunity of a financial crisis. The capital flows’ surges and reversals were free of any (or little) impediments to migrate from country to country. This must not, however, be confounded with the liberalization process, because this is not synonymous with the lack of regulation (but with few but strong laws).
Since understanding the behavior of investors in financial management assignment assistance financial markets is essential, there are broadly two opposite perspectives on the investment behavior of market participants: the traditional perspective and the behavioral finance’ perspective. The traditional finance’ view is built on the efficient market hypothesis and its applications. Regarding the efficient market hypothesis, the capital market is believed to be the market which is approaching the most to the efficiency market hypothesis. However, it is still far from it. A market is efficient if prices fully reflect all the available information, based on assumptions about the (perfect) rationality of investors and arbitrage. The capital market is efficient in the sense that stock prices adjust rapidly to new information. There are several motives for this affirmation. The assumption that the market is efficient, which implies efficiency at the highest possible level, suggests that each investor is a rational investor and reacts to news in the same way. The efficiency suggests that speculation, or at least incorrect speculation, does not exist.
The efficient market hypothesis suggests financial management assignment help online that people respond to information in the same way and the differences of investment and profit depend on the speed of reaction of investors to information and the lowest level of systematic risk that they can achieve. However, the capital market has attracted and still financial management assignment help service attracts investors who are hoping to gain huge profits after their investment strategies hedge. As a main result, the speculative potential of this market stop investors, analysts, fund managers, and investment firms to believe that the capital market is perfectly efficient.
If this market would be perfectly efficient (or people would thought this), there would be no analysts, fund managers or investors concerned to design investment strategies, or companies that value their knowledge and the history of financial management assignment help investment knowledge. Furthermore, the financial crisis of 2007 was one partially determined by speculation (in the real estate domain).
The asymmetries of information underline the financial management assignment help impossibility of the existence of a perfectly efficient market in terms of information. The basic argument is that the information has a cost and is not available to all the investors from a market at a given time (for example, the sellers have more information about the good they are selling, than the buyers).
The behavioral finance vision, which is opposed to the efficient market hypothesis vision, focuses mainly on investor psychology and the limits of arbitrage. Behavioral finance is assumed to have developed in response to the anomalies that could not be explained by help with financial management assignment the traditional finance models. This branch of finance concentrates on the emotional reactions of the investors, assuming that people are not perfectly rational (as the mainstream assume).
The emotional reactions are those that financial management assignment assistance shape the behavior of investors simply because they have the function of our body’s adaptation to everything around us. In the case of investors in the capital market, the most common reactions are herd behavior, risk aversion, which we have detailed above, fear and avarice, regret, and the excessive trust of investors in their skills, etc.
Beyond these emotional influences, in the financial management assignment solution psychological factors category cognitive errors are included. These are occurring as a human tendency to draw incorrect conclusions in certain circumstances and are based on cognitive factors rather than on rationality. Optical illusion, mental anchoring, mental compartmentalization of the individual portfolio, insufficient diversification, the error of maintaining too much a online financial management assignment help lose position and of giving up to fast to a gain position, the non-recognition of fair profits, the analogies with the past experiences, etc. are just some of these cognitive errors. Therefore, we can say that people are psychological beings and our financial management assignment writing help responses to market perceptions will always be a factor that will cause both capital and price fluctuations.
And (b) critically assess the policy options that, in principle, may be used to moderate capital volatility and its macroeconomic and financial effects.
In general sense, volatility is defined as the variability in time of a particular phenomenon. In economic theory it can be equated to the notion of fluctuation in the time series components of different financial variables. By definition, volatility is associated with uncertainty, thus becoming a key element in decision-making on financial markets. Volatility is affected by numerous factors: they manifest with the changes occurring in the market and with the information coming from other markets. Volatility of capital has a significant impact especially on small open economies. The emerging markets are known to have a higher volatility than the developed markets.
To manage the high volatility of capital flows Central Banks have three main possibilities:
- To use in the implementation of monetary policy. Here, they can consider a combination of three factors:
- The acceptance of a certain flexibility in the exchange rate
- The use of foreign reserves to mitigate exchange rate volatility and
- The acceptance of an interest rate variation on the monetary market.
- In addition, to counter the effects of volatility on the economy, the Central Banks have the option to implement:
- Additional prudential macroeconomic measures targeting, for example, the new credit flows in foreign currency for the borrowers exposed to the currency risk.
- Additional prudential microeconomic measures to strengthen the resilience of the micro credit institutions sector.
The solution to the volatility of capital flows is a combination of quality macroeconomic, micro-prudential and macro prudential measures. A crucial issue is how to coordinate these policies (given that they should act in a concert). In our view, central banks financial management assignment help should play a prominent role in all three areas, because, on the one hand, they have a vital interest in all these areas, and, on the other hand, they have the required financial management assignment help power and data. A possible delegation of powers to other institutions would be a help with financial management assignment suboptimal solution, given the potential conflicts of interest that might arise. However, next we will analyze these measures, both in terms of their macroeconomic impact and financial effects.
The policy options that may be used to moderate capital volatility (surge in capital inflows) can be classified in three main categories (as we already noted):
- Micro prudential regulations – These measures can be represented by:
- capping the mortgage credits at a certain percentage from the property value;
- banks’ compulsion to raise their capital in times of economic growth;
- the introduction of prudential filters;
- maintaining an appropriate level of the solvency ratio;
- maintaining an appropriate level of the degree of coverage provisions;
These domestic prudential policies have several implications.
- At macroeconomic level –These domestic prudential policies can be effective in stopping some credit’ booms. However, some specialists believe that the microeconomic policies examine only the response of the individual economic agents (such as banks) to exogenous risks. The approach does not deal with the endogenous risk (which cannot be financial management assignments help considered in this situation). So, risk factors are considered by micro policies as “exogenous” (outside credit institutions). Moreover, it does not take into consideration the systemic implications of the aggregate behavior (at macroeconomic level). The efficiency of this kind of measures is interpreted, in the context in which the 2007 financial crisis was triggered by the inadequacy of the subprime credits which occurred especially from the banking sector. Their main objective of the micro prudential measures financial management assignment assistance is to limit distress of the individual institutions. By this, they mostly propose to protect the consumer. Macro-prudential policies have emerged after it was recognized that the actions that are appropriate for individual entities collectively can collectively lead to (or can exacerbate) problems in the financial system.
- At financial level – These kinds of measures can be interpreted as important barriers that limit the activity of economic agents’ on the market. However, they can be used as main regulative factors that can prevent the occurrence of financial crisis. It is known, for example, that the monetary issuing is a central function of the Central Banks. However, Central Banks are issuing scriptural currency. The rest of the Banks, through their credit emission (both to institutional and personal credit lending) are in the position of expanding the monetary supply. They create account money, which have a liquidity issue. By regulating the amount of credits or by imposing a financial management assignment help online limit of reserves for the Banks, the governments try to regulate and supervise the monetary supply. The short run financial gains are in this case covered by the long run vision. Even if this kind of measures can be interpreted as a limiting factor of the economic activity, the losses on short term (due to the activity limitations) are transformed in long run financial gains (by preventing financial disasters which will cost much more, both the country and the banking and the financial sector). However, because their main objective is to protect the consumer (for example the depositor), they are irrelevant to correlations and common exposures across the institutions. However, because the final purpose of the micro policies is to protect investors and depositors of each credit institution taken separately, the macroeconomic concern is mostly neglected.
- Macroeconomic policies can be used to reduce macro vulnerability. In this category are included:
- The exchange rate appreciation. This measure can have several implications.
- At macroeconomic level – This approach is not suitable if the country is dealing with a large current account deficit or financial management assignment help competitiveness issues. The inflow surge, however, can be reflected by the domestic currency appreciation. The Central Bank may allow this situation. The use of this macroeconomic policy can have as a main effect the decrease of the domestic currency competitiveness (in rapport with the foreign currency taken as a reference point). The domestic currency appreciation will lead to larger imports of foreign goods and lower exports of national goods. As a main result, this has an important effect on the economic financial management assignment help competiveness of the country. In turn, the export demand reduction and the import demand increasing can directly affect the domestic aggregate demand, which is expected to fall. This situation will result in a reduction of the economic growth. However, an appreciation of the domestic currency can also tend to reduce inflation and this, on long term, can help to boost exports and reduce imports. The domestic currency appreciation can help with financial management assignment determine an improvement of the domestic goods to face the foreign competition. This means that on long term, the country will have more competitive goods that can face the powerful competition on the international stage, leading to stronger exports. This could determine, in the end, an improvement in the current account. In this case, because the effects can be opposite, the final effect of the appreciation financial management assignment solution depends on the situation of the economy and on the domestic economic agents to deal with it.
- At financial level – A first and most evident financial implication of the exchange rate appreciation is the fact that the national currency became more expensive related to the foreign currency. This means that the exports became are more expensive and the import became cheaper. The export reductions and the import increasing can determine disequilibrium in the trade balance, situation which can be costly for the country. This situation (especially on short run) will affect the balance of payments negatively, because the country will lose large amounts of money. However, we should consider the scenario in which this appreciation can lead to a reduction of the inflation level, on the long run.
- Monetary policy tightening – This approach can be associated most strongly with reserve accumulation and sterilization. The capital inflow can help the country to increase its reserves, in the case in which it has a low amount of foreign currency in it. This measure can have as a primary effect an inflationary pressure on the economy. Moreover, if the Central Bank is concerned about this inflationary pressure on its economy, it can intervene on the market through sterilization. The capital inflow in the domestic economy has as a main result an increase in the monetary supply; this is the amount of currency in circulation. The sterilization process consists of open-market operations. For example, the Central Bank can keep the condition of credit unchanged, so the sterilization process will have as a main effect the replacement of the credit given in domestic currency with one given in foreign currency. However, if the Central Bank cannot use the appreciation of its domestic currency, the increasing of the reserves and the sterilization process, then it must find some financial management assignment help other effective solutions. In this case, it can raise the (short term) interest rates, process which will determine the incentives for inflows’ reduction.
- The exchange rate appreciation. This measure can have several implications.
- At macroeconomic level – The reserve accumulation can induce negative externalities. For example, this process can have as result a deepening of the global imbalances. Furthermore, this can lead to diminishing the interest rate, which will favor the asset bubbles. The Central Bank can intervene on the foreign exchange rate to maintain its currency rate between some specific limits in extraordinary situations even in a floating exchange rate system. The Central Bank can realize an operation like this when an appreciation of the domestic currency is no longer needed because it has negative effects. When this situation adds a rising inflationary pressure, sterilized interventions on the market will be needed. In this case the effect can be a contrary one, because the sterilization process may be ineffective and, moreover, it can attract more flows inside the country, that are driven largely by yield financial management assignment help differentials (short-term flows). Moreover, the sterilization process itself has limits. For example, the domestic market could not absorb the bond issued through the sterilization operation or the excessive use of the increase of the reserve requirements can led to an undesirable financial disintermediation if it is used in excess. If the government chooses to raise its interest rate, this process will have several effects: will increase the cost of borrowing, will increase the mortgage interest payments, will increase the government debt interest payments and will lower the confidence. However, if the domestic economy faces inflationary pressures, increasing the interest rate can be a suitable solution, because it leads to a currency appreciation. On the contrary, if the government cannot afford the appreciation of its domestic currency, this measure can be ineffective.
- At financial level – The reserve accumulation is costly. If the country is indebted, the paid costs are proportional to the amount of their sovereign credit risk premium and the term premium associated with the foreign currency they choose to increase their reserves. The sterilization process allows the national interest rate to have a high level, fact that will have as a primary effect the further attraction of the capital flows into the domestic economy. A higher interest rate will negatively affect the aggregate demand. This process will led to an increase (appreciation) in the domestic currency value (reduce exports and increase imports) and an increased incentive to save rather than to spend. It also can determine a fall of the asset price on the long term, because a higher interest rate makes less attractive for the people the possibility to buy assets (for example, houses).
- Fiscal policy tightening – This measure is useful to apply financial management assignment help especially in the case in which capital inflows are led by fiscal expansion. Its tools comprise measures such as government spending cuts or higher rates of taxation. However, their scope may be limited, especially in emerging and developing economies.
- At macroeconomic level – This measure has as a main effect the reduction of the domestic currency appreciation pressure. It also can help to practice an active monetary policy. Moreover, it can be a useful tool for the reduction of the inflationary pressure.
- At financial level – The changes in the fiscal policy may operate with a lag. The increasing of the rate of taxation’ can discourage the people to work. This means that the government will face a online financial management assignment help decrease in the collected money for the state budget (because the active population is decreasing) and the rate of unemployment can increase. A decrease in the government spending can have as an effect a sub provision of public goods and services (for example in education, etc.).
- Capital controls – Fluctuations in capital inflows and outflows were approached by some countries by the (re)introduction of some financial management assignments help administrative controls. These measures are applied only to nonresident transaction, which enter the country from outside the national borders.
- At macroeconomic level – This approach represents a suboptimal solution, especially for emerging countries that depend financial management assignment help on long term, especially for modernization, on foreign capital inflows. They can be useful on short run. On long run, they can be used only as an additional tool only if the capital inflows are very large and temporary, and if they are not mediated through the banking system.
- At financial level – On short run, these measures may prove to be very effective and have benefic influences financial management assignment help for the country. On long run, on the contrary, if they are maintained a long period of time, they can affect the country development. As a result, their implementation can generate gains on short run and losses on long run.
- Macroeconomic prudential policies can be used to reduce systemic financial sector vulnerability. In this category are included:
- Measures aimed at financial institutions. These kinds of measures are useful in the situation in which the capital flows are intermediated through banking or financial institutions. If this condition is not fulfilled, they are effective only in the moment in which capital inflows reach to the operations accomplished by the financial institutions (for example by increasing the price of the assets or by contributing to the expansion of credit). Here we can mention banks’ assets or liabilities, such as limits on credit growth, foreign currency credit growth and reserve requirements.
- Measures aimed at borrowers. These kinds of measures can be interpreted in an identical kind with the previous one. They can be used in the situation in which the capital flows are intermediated through banking or financial institutions. If not, they became operable only when capital inflows reach to the financial institutions. Here, we can mention caps on debt-to-income and loan-to-value ratios, etc.
- Measures addressing bank buffers or which encourage counter-cyclical buffers. Here we can mention counter-cyclical capital, dynamic provisioning and profits distribution restrictions etc.
All these macroeconomic prudential policies have effects:
- At macroeconomic level – Macro-prudential policies consist of measures to ensure the health of the financial system help with financial management assignment or to prevent the problems which can arise in one part of the financial system. These policies are concerned with the viability of the banking system as a whole, as a vital center in the functioning of any economy. Risk factors are considered by prudential policies as “endogenous” (generated by collective behavior of banks). A success macro-prudential policy leads, in ultimate instance, to the accomplishment of the micro policy’s objective to offer a better protection of investors and bank depositors. In this sense, we can say that the micro policy is “subsumed” to the macro-prudential policy. We also can say that while the micro policy overstates in administrative measures in its attempt to protect every credit institution and each depositor, macro-prudential policy can achieve a better balance between market discipline and administrative discipline, without trying to provide excessive protection. Also, we can argue that the financial management assignment help service effectiveness of the macro prudential policies used depends on their adequacy to the particular characteristics of the domestic financial environment and their adaptation in time, as the circumstances modify. Moreover, they are in a strong relationship with the micro-prudential and monetary measures’ efficiency.
- At financial level – Macro-prudential policies can be helpful, but we are far from fully understanding their effects. In their case is possible to use many tools, some of which were never used in practice. The macro-prudential policy transmission mechanisms are not yet fully known. However, they are helpful especially for those countries which are in a large measure exposed to international shocks. They are mostly used to reduce the systemic risk, even if this risk is multidimensional and difficult to measure. However, macro-prudential policies suppose some important costs. Besides the implementation costs, they can affect the allocation of the resources. Because of this, it is possible to affect the financial sector development.
These measures, if used combined and on a real financial management assignment help base may prove to be advantageous for a country’s economy. For example, the countries which have adopted such control measures before the 2007 financial crisis managed better – their economic growth declined less. This happened because they were less exposed by debts and there was less volatile capital to leave the country in case of a global financial crisis.