American retail sales were surprisingly dreadful in December Earnings season is here to distract investors from everything else JPMorgan Chase and other banks post strong results as rates rise China is still the ultimate prize that Western banks can't resist Pandemic empties one of the world's busiest airports The world's insatiable appetite for electricity is setting up a climate disaster Dogecoin soars as Elon Musk says it can be used to buy Tesla merchandise Have you quit your job?
We want to hear from you US industry groups hail Supreme Court block on Biden's vaccine mandate The grocery cashier ringing you up is not OK Why no one has a quick fix for inflation — not Joe Biden or Jerome Powell If prices keep rising, a nightmare scenario for the US economy is possible. Meanwhile, the securitization of transactions and growth in the use of financial derivative instruments have made international financial flows more complex and less transparent, complicating supervision of financial institutions.
This section discusses several aspects of the effect of new global realities in financial markets on a nation's economic policies and financial oversight. Interest rates and the availability of capital in an industrial country are now much more influenced than in the past by interest rates and credit availability in other countries.
A corollary is that monetary and fiscal developments in a major industrial country have larger macroeconomic effects on other countries than they did when capital was less mobile internationally. A vivid example was the effect in of high interest rates in Germany on other members of the European Monetary System, as well as on other industrial countries, including the United States. The freer flow-of-funds among countries does not necessarily bring their interest rates into line with one another.
Interest rates can differ among countries when there exists an expectation that exchange rates will change or when there is a premium related to other types of risk. Nonetheless, a change in interest rates in a major industrial country can strongly affect both interest rates and exchange rates in other countries. The growth in cross-border deposits also has implications for monetary policies. When cross-border deposits were small and relatively stable, they could be ignored when examining the behavior of domestic monetary aggregates.
In recent years, however, the growth in these deposits has added to questions about the usefulness of monetary aggregates as indicators of the tightness or slack of U. The three major measures are M1, M2, and M3. M1 includes currency outside the Treasury Department, Federal Reserve banks, and the vaults of depository institutions; traveler's checks of nonbank issuers; demand deposits at all commercial.
Furthermore, it is argued that under floating exchange rates, increased international capital mobility can quicken the speed with which tight monetary policies slow inflation, since currencies tend to appreciate in response to higher interest rates.
The unusual speed of the U. Enhanced capital mobility also affects fiscal policy. In the past, when a country's fiscal policy led to a large budget deficit, the effect was primarily domestic, in the form of more rapid expansion of national income and output and possibly also in some crowding out of private investment as the government borrowed more and interest rates rose. Now a significant result may be a large trade deficit, if high interest rates attract funds from abroad and the exchange rate appreciates.
This phenomenon was evident in the United States in the s, when large federal budget deficits were accompanied by large trade deficits. Today, external imbalances are in many cases more easily financed than in the past by movements of foreign capital. As a result, large trade surpluses and deficits may cause less concern to market participants and to policy makers.
From another perspective, the more ready availability of international capital may provide domestic officials with more time to undertake the adjustments needed to correct domestic and external imbalances. Changes in current account balances do, of course, affect domestic income and employment.
And sustained imbalances can lead to the build-up of large international debtor and creditor positions that affect the real incomes and debt burdens of future generations. Yet another effect of capital mobility on domestic macroeconomic policies is that tax incentives to boost domestic savings for example, through increased tax deductions for individual retirement accounts may be less likely than in the past to generate a rise in capital for domestic investment.
Uncertainty about effects has. Overnight Eurodollar deposits of U. Term Eurodollar deposits held by U. They increasingly do so when they calculate they can earn higher rates of return, after allowing for exchange risk. As funds move more easily and more readily from one country to another, the prices of financial instruments for example, securities and foreign exchange may be subject to greater volatility.
Increasingly, exchange rates the prices of foreign exchange are affected by ''news"—the flow of new information—and by the expectations it engenders. The prices of bonds and stocks are similarly influenced. And exchange rates and securities prices interact with each other. Hence, securities prices in one country can now be affected by the behavior of foreign as well as domestic lenders and investors, although the degree of influence differs from one situation to another, depending on a variety of circumstances.
Thus, when the U. In principle, enhanced capital mobility could lead to more stable markets rather than to greater volatility of securities prices and exchange rates, since it makes markets less "thin" in terms of numbers of participants and potential flows of funds. Nonetheless, the information revolution, which has increased familiarity with economic, financial, and political conditions around the world and thereby encouraged international lending and investing, also brings a constant flow of news that can cause lenders and investors to make abrupt changes in their holdings in their own and other countries.
Thus, markets are vulnerable to larger swings—both in the short and medium term—in a world of integrated financial markets and enormous worldwide liquidity. The price dynamics created by derivative instruments can also exacerbate this potential. In foreign exchange markets, such swings in prices have led at times to coordinated intervention by central banks aimed at dampening the short-and medium-term volatility of exchange rates.
Since the February meeting of the Group of Seven finance ministers and central bank governors at the Louvre, the monetary authorities of those countries have attempted to maintain their exchange rates within broad ranges. The enormous volume of funds flowing across national boundaries and from one currency to another creates a risk that a breakdown in one financial system could spread across the world. The U. To make the required payments, they are dependent on receipts from others. If one intermediary in the payments mechanism finds itself unable, for whatever reason, to make the payments for which it is liable and others will not lend to it, problems for other institutions and in other centers can develop quickly.
In the commercial banking system, central banks have long been prepared to act as lenders of last resort to enable banks to cope with liquidity problems. The bank examination process also aims to guard against insolvency in commercial banks, and there is close international cooperation among supervisors of commercial banks, who meet regularly at the Bank for International Settlements at Basle.
But there are questions as to whether nonbank financial intermediaries—including brokers and dealers and investment banks—are equally well supervised and, if these nonbank institutions are adequately supervised, whether central banks should also act as their lenders of last resort. There have been some initiatives in the United States and abroad to improve the clearing and settlement systems since then. The Technical Committee of the International Organization of Securities Commissions has been working toward international risk-based capital adequacy standards for securities firms.
Efforts are being made to reconcile the differences between the capital requirements applicable to nonbank securities firms and those applicable to banks that engage in securities activities.
In the United States, Congress recently provided authority to the Commodity Futures Trading Commission to more fully share information and cooperate with foreign regulators. In addition, the Securities and Exchange Commission is considering adjusting U. Central banks and financial regulators have also become concerned about the risk exposure of participants engaging in derivatives transactions.
Risks are posed in many ways, including by the volatility of the underlying markets. A market participant's exposure can change drastically with fluctuations in interest rates or equity prices: a small shift in share prices, for example, can result in a big change in the value of a stock-index option. Other risks pertain to the management of sizable positions by large financial institutions and the credit quality of these "wholesale" enterprises and their customers.
Still another risk concerns illiquidity. Although derivatives traded on exchanges have many buyers and sellers, those tailored to specific customers' needs such as those traded in the over-the-counter markets are more difficult to liquidate since they are more difficult to value and to hedge against.
In addition, the opaqueness of some of these transactions, especially over-the-counter contracts, compounds the difficulty for regulators of monitoring market participants in derivatives. Furthermore, as more and larger traders, driven by technical trading methods, seek to move increasingly large sums between markets, market volatility is likely to increase. The closer linkages among markets that are fostered by the growth of derivatives mean that financial shocks can be transmitted across markets quickly.
The growth in derivative instruments has created not only complex chains of counterparty buyer or seller exposures but also, in the case of exchange rate contracts, a significant expansion of international payment and settlement activities. To reduce risks and guard against payment "gridlock," the Federal Reserve and other central banks are closely monitoring their payment and settlement mechanisms. In addition, the Basle Committee has focused on ways of expanding the Basle Capital Accord to cover credit risk and various types of market risks, such as foreign exchange rate risk, interest rate risk, and position risks in traded equity securities.
For a discussion of the various types of risks arising from derivatives transactions, see Federal Reserve Board of Governors et al. In sum, the interactions among countries' interest rates, exchange rates, and securities prices, hastened by the increase in capital mobility and the linkages of world financial markets, have major policy implications. The economic performance of one country—especially an industrial one with high capital mobility—will be affected by policies and market developments in other coun-.
There is a blurring of the traditional distinction between domestic and international economic policy. Policy makers in major industrial countries need to take account of policies and policy intentions elsewhere. In a world of growing interdependence among nations, enhanced capital mobility will, in some cases, help policy makers achieve their domestic macroeconomic objectives; in other cases, however, it may undercut the effect of national policies on domestic economic performance.
In this new global economic environment, to better formulate U. At the same time, the unprecedented changes in global financial markets have reduced the effectiveness of traditional data collection methods and the adequacy of the existing data. This section provides an overview and some examples of the deficiencies of the existing data. The rest of the report addresses the shortcomings in detail and presents the panel's recommendations for data improvement.
The present U. At that time, portfolio investment was largely channeled through such traditional financial instruments as bank loans and deposits, denominated mostly in U. The current system, as it has evolved, still emphasizes the collection of data on traditional international banking transactions. But the rise in nonbank market participants in particular, institutional investors , the surge in international financial flows and their diversification across currencies, the increase in offshore financial activities, and the burgeoning international trade in derivative financial instruments have outstripped the coverage of the U.
Rapid technological innovations have also allowed numerous transactions to bypass domestic financial intermediaries, and such transactions are beyond the reach of the traditional reporting mechanisms, thus raising questions about the adequacy of relying largely on domestic data filers. Meanwhile, as U. The conceptual framework under which the existing data are collected, that of the balance of payments, defines U.
See Chapter 2 for a detailed discussion of the U. The purpose of this framework is to compile information on economic exchanges that cross the border between the United States and the rest of the world. These data provide vital information needed to understand the external sector of the economy and how it affects domestic economic activity.
International transactions, defined in this way, are a component of the national accounts which include the national income and product accounts, the flow-of-funds accounts, and the balance sheets of the U.
However, as financial activities have become global in nature, the resident-nonresident distinction has become inadequate to fully depict all facets of these activities. Increasingly, cross-border financial exchanges represent capital transfers among the worldwide offices and branches of U. There is also a growing presence of foreign-owned firms in the U. These developments have complicated the identification of resident versus nonresident transactions.
More important, as discussed above, internationalization of financial transactions has given rise to policy concerns about the liquidity, solvency, and stability of the U. These are issues the balance-of-payments framework was not designed to treat.
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Open Library is a project of the Internet Archive , a c 3 non-profit. This edition doesn't have a description yet. Can you add one? Add another edition? Copy and paste this code into your Wikipedia page. Salon - Regulation and housing 10m. Within Firm Regulation, part 1 5m. Within Firm Regulation, part 2 7m. Local Regulation 3m. National Regulation, part 1 13m. National Regulation, part 2 15m. National Regulation, part 3 11m. International Regulation 6m. Lesson 10 Quiz 30m. Lesson 11 Quiz 30m.
Module 4 Honors Quiz 30m. Show More. Week 5. Options and bond markets are explored in module 5, important components of financial markets. Video 16 videos. Salon - Student Loans 4m. Forwards and Futures Introduction 7m. Forward Contracts 7m. Futures Contracts 4m.
Buying, Selling, and Settlement 10m. Fair Value in Futures Contracts 4m. Options Overview 5m. Reading Options Pricing 7m. Why Options exist 9m.
Ubiquity of Options 5m. Using Options to Hedge 7m. Lesson 12 Quiz 30m. Lesson 13 Quiz 30m. Module 5 Honors Quiz 30m. Week 6. Video 19 videos. Investment Banks Introduction 5m. The Underwriting Process 11m. Goldman Sachs and John Whitehead 4m. Ratings Agencies 4m. Net Worth of the US 8m. The Prudent Person 4m.
Salon - Advisors 9m. Mutual Funds and ETFs 9m. Brokers and Dealers 8m. Limit Order Book 4m. High Frequency Trading 5m. Payment for Order Flow 6m. Government Debt 11m. Government involvement in Corporations 6m. Municipal Finance 9m. Government Social Insurance 11m. Lesson 14 Quiz 30m. Lesson 15 Quiz 30m. Lesson 16 Quiz 30m. Module 6 Honors Quiz 30m. Week 7. Video 15 videos. Nonprofits 11m. Alternative Forms 5m.
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