Domestic Financial Policy Research Articles

МОДИФИКАЦИЯ IS-LM-BPМОДЕЛИ В РАМКАХ КОНЦЕПЦИИ НЕОКЛАССИЧЕСКОГО СИНТЕЗА

With the intensification of processes caused by globalization, the relevance of the studies about the impact of exogenous shocks in the global markets for wealth and money on the macroeconomic parameters of a small open economy is growing. Moreover, the basis of modern economic relations within the global economy is not only the global trade in goods and services, but the international movement of production factors. Migration of labor resources starts playing an increasingly important role in the sphere of the international movement of production factors. The study of these processes and their further analysis is possible within the framework of the IS-LM-BP model supplemented by the labor market data. The IS-LM-BP model is still a significant theoretical and methodological development, which allows us to analyze the impact of exogenous shocks on the global and domestic markets of goods and money markets on a small open economy, as well as evaluate the effectiveness of state regulation. The opportunity to assess the impact of the exchange rate regime and the mobility of international capital on the effectiveness of state regulation in a small open economy, as well as on the mechanism for adjusting disturbed double equilibrium under the influence of exogenous shocks is considered to be the most interesting. However, the most important macroeconomic market – the labor market – remains outside the framework of this model. The purpose of the study is to modify the IS-LM-BP model developed in the framework of the concept of J.M. Keynes including a new curve – the full-employment curve in the model. The derivation of the curve is based on the theoretical premises of the neoclassical concept: full employment directly depends on the real interest rate in this model acts as an endogenous parameter. This study is based on Keynesian principles of double equilibrium in a small open economy supplemented by neoclassical ideas about full employment as an endogenous parameter. The modification of the IS-LM-BP model based on the principles of neoclassical synthesis means the development of a full-employment curve and including it in the case study model based on the basic principles of the theoretical justification of this macroeconomic model. The full-employment curve identifies the equilibrium curve in the neoclassical labor market. The reason for its inclusion in the IS-LM-BP model is the existing theoretically substantiated relationship between the real interest rate and the supply on the labor market as part of the concept of a new classical school. The dependence is based on the inter-temporal price of labor, which, in turn, is directly dependent on the real interest rate. Since the derivation of the full-employment curve is based on the neoclassical postulates of the functioning of the labor market, the suggested modification of the IS-LM-BP model can be considered as an example of neoclassical synthesis. The IS-LM-BP model modified by the author is proposed as a methodological base for the study of such theoretical and practical aspects of the functioning of open business systems as: 1) the analysis of the adjustment mechanism in the process of restoring disequilibrium in the labor market, goods, money and foreign exchange as a result of exposure to exogenous shocks; 2) the analysis of the effectiveness of state regulation in the functioning of the labor market, goods, money and foreign currency; 3) the comparison of the desired theoretical model with the real processes inherent in small open economies. Keywords IS-LM model, Mandell-Fleming model, IS-LM-BP model, real business cycle model, full-time curve, Keynesian concept, neoclassical synthesis, IS-LM-BP-NF model, exchange rate regime, capital mobility, small open economy.

Capital Account Liberalization, Financial Structure, and Access to Credit in Latin America

ABSTRACTThis article revisits the question of whether capital account liberalization improves access to credit by advancing and testing a theory of how the structure of the financial sector shapes the willingness and ability of banks and governments to repress the domestic financial sector. In a highly concentrated financial sector, banks and governments are more willing to reap the benefits of financial openness by suppressing liberalizing reforms to domestic financial policies, and they can also better coordinate with one another to stifle these reforms compared to when the financial sector is diffuse. Using a panel dataset of Latin American and Caribbean countries, I find that capital account liberalization leads to a decrease in loans to private firms and households and an increase in loans to governments and state-owned enterprises when the financial sector is highly concentrated. Only when the financial sector is diffuse does capital account liberalization lead to reforms in entry barriers, directed credit programs, and banking sector supervision, which extends to improved access to credit for private firms and households.

Why Should Emerging Economies Give Up National Currencies? A Case for Institutions Substitution

This chapter argues that abandoning national currencies to adopt a hard currency can be an effective policy for emerging economies to deal simultaneously with the lack of credibility of domestic financial policies and the imperfections of globalized capital markets, and is organized as follows. Section 5.2 documents key features of emerging-markets crises that point to the central role of noncredible policy and imperfect capital markets in causing the crises. Section 5.3 reviews some analytical results which suggest that the globalization of (imperfect) financial markets had endogenous mechanisms which increased the vulnerability of emerging economies to sudden stops. Section 5.4 summarizes an analytical framework for studying economic fluctuations in a small open economy that features a transmission mechanism linking imperfections in world capital markets with lack of credibility, or uncertain duration, of domestic economic policy. Section 5.5 draws policy conclusions.

International Capital Flows and Growth in India: The Recent Experience

Capital flows are most helpful when the magnitude of those flows is steady and stable. The international capital flow such as direct and portfolio flows has huge contribution to influence the economic behavior of the countries positively. Countries with well developed financial markets gain significantly from Foreign Direct Investment (FDI). The huge volume of capital flows and their influence on the domestic financial markets, understanding the behaviour of the flows becomes very important especially at time liberalizing the capital account. The study attempts to examine the impact of international capital flows on economic growth. The study also examines trends and composition of capital inflows, changing pattern capital flows in view of economic reform, ascertain the impact of domestic financial policy variables on international capital flows and suggest policy implication thereof. By using monthly time series data, we found that Foreign Direct Investment (FDI) is positively affecting the economic growth direct contribution, while Foreign Institutional Investment (FII) is negatively affecting the growth alb its, in a small way and make a preliminary attempt to test whether the international capital flows has positive impact on financial markets and economic growth. The empirical analysis using the time series data between April 1995 to April 2007 shows that FDI plays unambiguous role in contributing to economic growth.

The Evolving Role of China and India in the Global Financial System

Three main features characterize the international financial integration of China and India. First, while only having a small global share of privately-held external assets and liabilities, these countries are large holders of official reserves. Second, their international balance sheets are highly asymmetric: both are "short equity, long debt." Third, China and India have improved their net external positions over the last decade although neoclassical models would predict them to be net borrowers. We argue that domestic financial policies are key to understanding these patterns and the future role of China in the international financial system.

DOES INTERNATIONAL FINANCIAL CONTAGION REALLY EXIST?

In the 1990s, exchange rate crises followed stock market crashes and sharp economic contractions, with devastating effects on countries around the world. The frequency and extent of these events led many policymakers, regulators, journalists, and market participants to declare a “crisis of global capitalism” and to call for a new “international financial architecture.” When financial crises occur in neighboring countries in rapid succession, it is tempting to believe that financial distress is capable of spreading like a contagious disease. Moreover, it is logical to look for potential carriers of such a disease among market participants such as commercial banks, international mutual funds, and global investors.The problem, however, is that much of the evidence does not support the idea of international financial contagion. This article surveys and synthesizes the empirical evidence on international asset price co‐movements, the volatility of cross‐border capital flows, and the relationship between those flows and asset prices. A careful reading of this evidence suggests that the observed co‐movements during the 1990s might not have been excessively large, given the global economic and capital market environment. As the author suggests, the appearance of what some might call contagion could instead be attributed to errors in domestic financial policies that have simply been repeated many times by affected countries in response to common economic shocks. And this in turn implies that while the various reform proposals to date have been directed mainly at the international and supra‐national level—involving questions such as the appropriate exchange rate and international financial market regimes, and how to organize the IMF and the World Bank group of the future–the most important questions may be those concerning government policy at the national level. Fiscal and monetary policymakers may need to rethink how their governments regulate access to the domestic financial sector, how their markets are supervised by the central bank, and how such supervision can be used to improve risk management for the financial service sector.

The Eurocurrency markets, domestic financial policy and international instability

Introduction: history of the Eurocurrency markets. Part 1 Interdependence, arbitrage and the removal of UK capital controls: interdependence and monetary policy the effect of the Eurocurrency markets on the arbitrage process - the Mundell-Fleming propositions some empirical analysis of the US and the UK - Eurodollar-Eurosterling relation and US domestic arbitrage, domestic sterling and Eurodollar, domestic sterling relations, interdependence and monetary policy in the UK. Part 2 Competition, efficiency and stability in financial markets - the case of the international credit markets: competition, stability and efficiency in international banking maturity transformation, risk-return analysis and credit rationing in the Euro-markets policy implications of the internationalization of capital.