Assignment Writing Help on The Global Economy on Currency

The Global Economy on Currency

                    Developing countries have faced critical conditions and adverse demand shocks in their economy as a result of economic recession that may be portrayed as a short-term event. However, the consequences are usually dire thus calls for immediate government’s response to increasing the money supply in the market, the government spending as well as to reduce taxation. Recession may lead to high chances of unemployment, reduced economic activities conducted by a given state and falling incomes. Though the living standards of a particular country will depend on the ability to produce goods and services.

                    A full-blown of recession or depression and an unemployment increase that most of the countries faced during the Asian economic crisis serve to be the most crucial economic event that every country ought to have learnt to maintain the global economy. Understanding of macroeconomic stability stands to be very vital for the economic growth of a particular country. This can help to minimize and reduce the poverty level and as well to raise the income of a specific region. The decline in investment rates, explosive exchange rates, high-interest rates within the market and the growing current account imbalances are as a result of mismanagement and the shortcomings of macroeconomic.

                    For the first phase of the Asian crisis, both the countries of G7 and the international establishment placed the blame directly to the domestic ills and cited bad judgment on banks and financial institutions, the secret agreement between the government and businesses over the speculations in market shares as well as real estate. They indulge on wrong policies of accepting a fixed exchange rate leading to high current account deficits that were experienced in most of the countries. Instead, they studiously avoided blaming the financial markets or speculation in currency, or even studying the behaviors of huge institutional investors that could be the cause of the crisis.

                    An increase in the expansion of employment as an input usage undoubtedly increases the education levels, and the high investments in the physical capital would increase the output levels. In order to marginalize the situation, the central banks have the mandate to provide liquidity to the banks and other financial markets to curb the situation. Amendments on the monetary operations have been made to save the liquidity stress. This is implemented by reducing the penalties associated with the banks that have missed their reserves target. They have also limited the pressure through reducing the discount rate at which banks could access standing facilities.

                    The Central Bank has played a role in designing and taking oversight of all payments and settlement systems that reduces problems associated with credit risks. Implementation of monetary policy is also an important tool to be employed by Central Bank. However, Goodhart and Charles (2008) states that micro prudent objectives may have conflict with macroeconomics objectives set by the Central Bank thus compromises the monetary policy conducts by hesitating to impose the appropriate measures to the banks that are operating at solvency. The Central Bank need solves the situation that led to the shortage of cash that led to the Asian crisis. Therefore, it will act as the Lender of Last Resort (LOLR).

                    LOLR helps to prevent or rather extenuates the financial inability of the commercial banks in different countries through the provision of liquidity support to financial markets on to the individual financial institutions that trade on market segments. Incapacity to act as LOLR by the Central Bank, it will transact through lending and borrowing in an open market designed to address the liquidity pressure. The relevant policy interest rate will be met through an application of LOLR monetary form to address adverse problems. The Central Bank would lend to both the reserves and government bond that are highly types of liquid securities.

                    In order to reduce the slowdown in the economic activity or enhance the growth prospects, the financial markets analysis and reducing the risks of instability in the macro economy will be much needed. The fiscal policies made should be supportive in order to stabilize the country’s economy and its growth. Much consideration should be put into the crucial credible actions geared to reduce the budget deficits, which in turn reduces the current account deficit lowering the real interest rates, and to bring stability in the exchange rates within the market. Consequently, monetary policy should also seek to contain the growth of the money supply through monitoring the inflation, with the increased reliance on indirect financial instruments especially the open market operations. It is therefore evident that weakness in the financial system, inadequate economic policies as well as the unsustainable decline in macroeconomics fundamentals would have been the cause root of the Asian currency crisis.

                    There has been a considerable influence of a dollar in the economy. The dollar currency do fulfils the three functions i.e. a medium of exchange for both financial and commercial transactions, a reserve currency that is a store of value and it is used to set prices both domestic and international levels. The role of money as a medium of exchange is partially tied to its use to set price in the market. In most cases, the international trade gives full support on the use of currency since most of the commodities are priced in dollars especially in the United States’ base market (Charles, 2010).

                    The changes in the expected monetary policies influenced the exchange rate movement. When borrowings are done at a low-rate currency and lend at a higher rate by currency traders, the value of the initial trading is pushed down against the latter. This required that all borrowings are to be relatively easy, and the risk aversion to below i.e. exchange rate risk. Influence of the return differentials later diminished as a result of the breakdown of the trading process. The fall in the exchange rate, usually come as a consequence of the higher interest rates than that which countries trade on. The appreciation of the low yielding currencies (yen and dollar) immediately after Lehman Brothers’ bankruptcy had a direct impact of a sharp increase in risk aversion. These factors need to be considered to keep the economy at par.

                    Mostly, a country such as China has always focused exporting large quantities of its products in order to achieve a long-term global growth objective. This replica from the Asia has achieved an increase per capita through their exports. The China’s currency policy has bared the emergence of strong domestic customer market within the nation. The country’s low currency (yen) encourages over-investment especially in the country’s export manufacturing industries at the expense of the domestic market. The imports of the products that could be done in the country could be very expensive due to the undervalued currency in the market. Through the country’s foreign reserves, the banks have allowed only small portions of appreciation against the dollar. The functions of the dollar currency are subject to the network externalities (Portes & Rey, 1998).

                    Banks that have accumulated a vast amount of dollars I emerging markets are getting worried of the possible decline in the greenback’s value, therefore, shifting their reserves into euro asset. However, a speculation that a euro would end dollar supremacy is not real. According to Chinn & Frankel (2008), the debates on the role of dollar are to be based on the financial and economic failures, or rather as a result of certain potential rivals in the market that emerging. Even though a competitive currency, i.e. euro may be in the market, it cannot displace dollar in the market as a result of US economic and financial weakness. The volatility of the US dollar in the market as a reserve currency has a strong effect on the currencies of other nations. External factors may influence the rise of dollar currency in the market that exaggerates the depreciation. The exchange rates pressure will be as a result of the impact of dollar funding shortage within the banking sectors outside the US boundaries.

Managing of the capital flows has remained an urgent policy challenge.

            The central banks of the most of the developing countries have taken part in reallocation of the currency risk associated with the capital flow. This is aimed at helping them to sterilize the impacts of their foreign exchange. Challenge has been experienced towards building foreign economic policies that contributes to recognize the risks and opportunities in order to incorporate into the economy. In fact, majority of the developing nations are operating under a floating exchange rate authorities. The capital controls and the exchange rates restrictions must be eased and simplified. Improvements should be made especially in macroeconomic policies and development of the local capital markets to strengthen and to maintain the inflows on short-term debt.
Developing financial systems are particularly vulnerable to excessive credit expansion

            Banks usually experience a sharp increase in the loan segments that would lead to insolvency problems. Non-performing loan tends to rise where credit expansion accompanies or follow the deregulation of the national financial systems. In turn, this may lead to insolvency problems especially to situations where the regulatory body and the banks’ credit evaluation are weak. The unanticipated local currency devaluations can increase the cost of servicing debts where large amounts are borrowed from banks and companies in non-local currency terms. The conventional monetary policy operations before the crisis was the inflation targeting that were relying on the growth of money aggregates of could be the exchange rates of the currencies in the market to attain the stability on the sustainable growth. This has always been maintained by developed countries as opposed to those that are underdeveloped.
Monetary policy challenges

            Advanced countries have felt the burden of the global adjustment through their fiscal debt and deficits. The steering of the monetary policy that lies in hand with the country’s goals to sustain growth has been an important challenge. The multi challenges that are based on institutional design, policy tools to access macro economy and regulation that helps to identify the emerging financial risks with the spillover potentials to the real economy. Abrupt fluctuations in the capital usually flows have an influence on the exchange rate movement. Within the global market, when tight credit conditions are set, private investors will trade safely through the market.

References

Charles, W. (2010). Is the Era of the Dollar Over?, Journal of Globalization and Development: Vol. 1

Chinn, M. & Frankel,  J. (2008). The Euro May over the Next 15 Years Surpass the Dollar as Leading International Currency. International Finance 11(1)

Goodhart,  & Charles A. (2008). Central Banks. Function to Maintain Financial Stability: An Uncompleted Task,” Vox Research, June 24.

Portes, R. & Rey H. (1998). The Emergence of the Euro as an International Currency. Economic Policy