Financial Instability Essay -- Financial Market Finances Accounting Es

Financial Instability The soaring stack of international pay and increasedinterdependence in recent decades has increased concerns about capriciousness andthreats of a financial crisis. This has led many to investigate and analyze theorigins, transmission, set up and policies aimed to impede financial unstableness. This paper argues that financial liberalization and speculation are the most reflective explanations for instability in financial markets andthat financial instability is likely to be transmitted globally with farreaching implications on real sector performance. I conclude the paper with theargument that a global transaction tax would be the most effective insurance tocurb financial instability and that other proposed policies, such as tushzones and the creation of a supranational institution, are either unfeasible orunattainable.INSTABILITY IN FINANCIAL MARKETS In this section I quiz four interpretations of how financialinstability arises. The first inter pretation deals with speculation and thesubsequent bandwagoning in financial markets. The second is a politicalinterpretation dealings with the declining status of a hegemonic anchor of thefinancial system. The question of whether regulation causes or mitigatesfinancial instability is raised by the third interpretation while the fourthview deals with the trigger point phenomena. To fully comprehend these interpretations we must first understand anddifferentiate between a property and transmittance crisis. A currency crisisrefers to a situation is which a loss of bureau in a countrys currencyprovokes capital flight. Conversely, a contagion crisis refers to a loss ofconfidence in the assets denominated in a particular currency and the subsequentglobal transmission of this shock. One of the more paramount readings of financial instability pertains tospeculation. Speculation is exhibited in a situation where a disposalmonetary or fiscal policy (or action) leads investors to believe that thecurrency of that particular nation will either appreciate or depreciate in termsrelative to those of other countries. Closely associated with these speculativeattacks is what is coined the bandwagon effect. Say for example, that acountrys central bank decides to undertake an expansionary monetary policy. Ane... ...onalFinancialMarkets, in Gerald Epstein, Julie Graham, Jessica Nembard (eds.),Creating a New World prudence Forces of Change and Plans of Action (TempleUniversity Press, 1993).Charles Hakkio, Should we stuff Sand in the Gears of Financial Markets?Federal Reserve Bank of Kansas city Economic Review, 1994.Richard Herring and Robert Litan, Financial Regulation in the Global Economy (Brookings Institution, 1995).Ethan Kapstein, Shockproof The End of Financial Crisis Foreign Affairs, January/February 1996.Charles P. Kindleberger, The World in Depression (London Penguin 1973).capital of Minnesota Krugman, International Aspects of Finan cial Crises in Martin Feldstein,ed., The Risk of Economic Crisis (Chicago University of Chicago Press, 1991). seat McCallum, Managers and Unstable Financial Markets Business QuarterlyJanuary 1, 1995.James Tobin, A device for international monetary reform Eastern EconomicJournal 1978, volume 4.John Williamson, The Failure of World financial Reform 1971-1974) (NYNYU Press,1977)L.B. Yeager, International Monetary Relations Theory, History, and Policy 1976..