Rapid Economic Growth: The monetary policy effects the economic development by controlling interest rates in the economy and its effect. 2. Price Stability: the price rise leads to inflation. Too much of inflation is harmful that the central bank has to control using these policies 3. Exchange Rate Stability: it is the rate at which the currency is exchanged in terms of any other foreign currency.
Interest rates, inflation, and exchange rates are highly correlated; interest rates have been used by Central banks to exert influence over exchange rate and inflation as a fiscal policy, high interest rates attract foreign capital and tries to rise the exchange rate, on the other hand this impact could be mitigated by the high inflation differential between countries (Bergen, 2010, para. 5). As a general rule, A fall in the interest rate will lead to a fall in the value of the currency against other currencies, if Country A interest rate declines, then more investors in that country will withdraw their money from the banks in order to invest them in the U.S., therefore, the funds transferred to the U.S. would pressure Country A’s currency to lose value (Aashwin, 2005). Moreover, Country A interest decrease will encourage the demand of U.S. currency while the supply of Country A’s currency will rise, thus, Country A’s currency will depreciate or worth less in terms of the U.S. dollar. Similarly, Country A’s investor might find viable to exchange Country A’s currency for Country’s B currency as a bridge to finally make a conversion to U.S. dollars.
The Twin Crises: The Causes of Banking and Balance of Payment Problems, American Economic Review, 89, (3), 473–500. Killoren, G.D. (2009). How Government Economic Policies Caused the Financial Crisis of 2008. Retrieved from http://rawfinanceblog.com/2009/07/23/how-lax-u-s-monetary-policy-contributed-to-the-financial-crisis Lothian, J.R. (2009). U.S. Monetary Policy and the Financial Crisis.
Hayek, Murray Rothbard, and Ludwig von Mises believe that government plays a negative role in the boom and bust cycle. They believe government involvement especially with the Federal Reserve causes economic busts. When the Federal Reserve lowers interest rates below the natural rate of interest based on supply and demand, it increases malinvestment.
It influences the price of imports and can have an effect on a country’s price level (inflation rate). In addition, it influences the international investment and financing decisions. Exchange rates present many risks to a company and a company must be able to hedge itself (Gray, 2003). The price of one currency expressed in terms of another currency is called an exchange rate (Gray, 2003). Foreign investors need to sell in a foreign currency to be competitive.
In fact, the international nature of financial institutions makes them particularly vulnerable to change. This paper addresses three issues caused by the globalization of the international monetary community. First this paper examines the success of the Euro, and the implications for the formation of a global currency. Then this paper looks at the issue of devaluation, and by comparing successful and unsuccessful devaluations tries to determine what factors make a devaluation work. Finally this paper will look at the trend toward dollarization, and whether or not dollarization is the best solution for struggling economies.
I. Introduction The current financial crisis was triggered by subprime mortgage in the United States. This lead not only to a large amount of mortgage default but also other problem suc as, credit card and store loans. The result was huge losses in financial institution in the United States Europe and Asia, because of financial liberalization had enabled the transnational transaction of “bad” assets. Some people argue that this crisis was aggravated by Fair Value Accounting because it prices an asset based on its current value.
I also examine whether asset risk weighting is effective in measuring the degree of bank riskiness. Therefore, I test whether response of bank managers to declines in regulatory capital changes through risk-weighted assets is associated with other measures of risk. Finally, I conjecture that managers use discretion to manage regulatory capital through changes of asset positions and classification to relevant risk classes. 1. Background and Motivation Looking at the contradictory results of prior research on bank capital structure, banks seem to face conflicting goals emanating from shareholders, debt holders and regulators (Gropp and Heider, 2009).
In the words of John Maynard Keynes, “The ideas of economist both when they are right and when they are wrong are more powerful than commonly understood. Indeed the world is ruled by little else.”(Keynes, 2008) p247 The answer to those questions can be answered by research into this subject. As I answer those questions, I will also be able to answer the major question of: What has caused booms and busts in the past and how or can we prevent them? What is the History of Money and Banking? Before answering the major question, the history of money and banking must be discussed.
Monetary policy in the great depression: What the fed did, and why. Review - Federal Reserve Bank of St.Louis 74, (2): 3-3, http://search.proquest.com/docview/227736885?accountid=12964 (accessed April 29, 2013). 12. Friedman, Milton, and Anna J. Schwartz. A Monetary History of the United States, 1867-1960 (Princeton University Press, 1963).