Tuesday, December 10, 2019
Demography Inflation and Monetary Policy Ã¢â¬ MyAssignmenthelp.com
Question: Discuss about the Demography Inflation and Monetary Policy. Answer: Introduction: Since the period when the world had witnessed the global recession of 2008, financial markets, numerous organisations and banks have continued to suffer its long lasting effects. The current market trends have been positive but the lingering effects of the global turmoil of the erstwhile years are still reflected to this date (Eton et al.2016). Financial institutions and banks still continue to operate keeping in view these financial implications. Banks which are regarded as one of the most important contributors of a nations economic growth were hit the most, when the recession had struck in. Combined with the volatile market conditions, the effects of past recession and the malpractices which have crept in the banking sector have significantly impacted the banks performance (Barthe 2017). Today, banks have been encountering the problem of low profitability when compared to the profits of other industries like petroleum and technology. The major financial scandals and scams have led to a loss of trust of the customers on the banking industry. Moreover, the financial downswings and the depleting fiduciary issues with its customers have seriously impacted the banks. The Libor scandals and other cases of money laundering associated with banks have also led to significant amount of reputational loss for the banking sector. This has compelled them to restructure and reinvigorate the commonly practised banking ways to give way to innovative and robust banking ways, in order to improve profitability and revitalise the long lost trust. One of the most neglected factors behind the financial downfall has been the depreciating corporate culture, prevalent in the banking sector. The lethargic and passive corporate culture has been one of the foremost reasons for the downfall of the banking industry (Darmine 2013).There is an innate relationship between corporate cultures practiced in banks with their performance. Corporate culture which practised in the banking industry has significant impact on the banks performance for various reasons. Some of them are: The profitability and performance of the banks are deeply embedded in the practices adopted in the corporate lifestyle of the bank officials. Their motivation, presence and participation in the day to day banking procedures have a direct correlation with their overall performance and motivation. Good compensation for the employees drives them to perform consistently. Everybody wants a part of the profit. Consequently when the banks perform well, the employees also want a part of the profits too. According to Kevin Stiroh of Harvard business review, an organisation which consistently maintains and strives to attain a high level of cultural capital and structure, maintains a comparatively low rate of misconducts and financial risks in their day to day functioning. In such an organisation, the companys policies, processes, values and aims are continuously in aligned with the motivation and morale of its employees.In such a scenario, the tendency to commit financial frauds of any kind decreases, consequently increasing consumers confidence. According to Thakors 2016 paper The Federal Reserve Bank of New York Policy,a consistent and strong culture can also essay the role of a perfect associative matching device, which acts as the link between banks and their employees, when both the parties have the same views about the market opportunities and growth. The importance of culture in the banking industry can no longer be ignored. The financial misconducts, scandals, scams would continue, if timely steps are not taken. The presence and acknowledgement of culture in the banking industries is of paramount importance. All this while, the cultural factor has been ignored by the various officials of the banking industry. Despite the involvement of banking officials in upholding the importance of cultural capital in the banking industry, market misconducts still exists. As per Thakors findings, this happens primarily because of the three prominent factors which are Externalities, Principal- Agent relationship and Adverse Selection. Externalities refers to the impact a variable has on the other when each of them operates in the same environment. When a company pollutes while making its products, the ultimate burden falls on rest of the society and not on the immediate buyer or the seller (Thakor 2016). Principal Agent problems occur when the interests of the employees are not in proper alignment with the companys goals and policies. Adverse selection, on the other hand occurs when, persons who are not qualified for the job are selected for those tasks and purposes. When such practices occur regularly, despite working towards the cultural capital of the company, no significant changes takes place in avoiding the financial scams and misconducts. The bank executives must use stringent actions to stop these misconducts. Usage of zero tolerance policies and undertaking criminal cases against the individual perpetrators is the need of the hour. Moreover today, it becomes imperative for the government and the public sector to be involved in the banking sector and invest in its cultural capital in order to uproot the evils of financial misconducts and scams. The concerned diagram comes under the purview of Macroeconomic theory. The diagram presents the complete cycle of the implications political pressure on trade and a countrys overall financial performance. The steps elaborately explained below: Political Pressure: Political pressure refers to the pressure exerted by the political parties upon the various parts of an economy. It is generally backed by ulterior motives and may or may not result in any positive bearing upon the economy. Rise in Public sector expenditure: Political expenditure is followed by an increase in the expenditure of public sector. It can happen in many ways. For instance, when the government increases spending on defence and other allied sectors. This creates a monetary vacuum in the hands of the customers because of the diversion of the funds. Fiscal deficit: A fiscal deficit takes place when the total expenditure incurred by an economys government surpasses its revenues, the negative income created as a result of this is known as deficit. This has a lot of implications and impact on the economy. The impact can both be negative as well as positive in nature. Economists like Keynes believe fiscal deficit is good for an economy as it helps it to climb out of the pitfalls of economic depression. Whereas, conservationist economist believe that a government should strive to avoid scenarios of fiscal deficit to maintain a balanced approach. Price rise: One of the most dangerous implications of fiscal deficit is the increase in the prices of the commodities. This causes a great amount of distress for the common consumers. The fiscal gap compels the prices of the various goods to increase. This happens because the government needs money to recover the deficit gap, which was created by the fiscal deficit. Debt monetization: Monetizing debtis a two way procedure where the government issues debt generally which are government backed bonds to cover its spending, which leads to the purchase of those bonds by the central bank of the country. They keep them until they become due for payment and consequently, they purchase it from the government leaving them with more money in their hands. Deficit finance: Deficit financing refers to the procedure where the government in order to fund its excess expenses and spending, borrows extra funds from the market. It is another method of increasing money supply in the hands of the government and is caused due to its excessive spending. They do it either by borrowing or by printing new notes. Drop in expected real interest rates: Due to the usage of deficit finance and monetization of debt, there is a drop in the real interest rates. If the government borrows more, this can cause interest rates to increase. This is because they will need to increase interest rates in order to attract the private sector players to buy the extra debt. In the actual scenario, there is a drop in the interest rate because the interest rates go up in from their normal level, leading to a huge void in the financial market and less money in the hands of the public. If exchange rates are held constant, then a temporary period of normalcy remains in the international trade. Soon, the implications of excess fiscal deficit creeps min the exchange rates too and they also change their state. Other implications: There are various other implications of fiscal deficit, such as decline in exports as the government now becomes more depended on imported goods to fund their existence and trade. Imports increase and the net capital outflow increases, which is bad for an economy. Rise is debts takes place which results in service burden upon the entire economy, leading to a scenario of excessive demand and low supply (Juseliu and Takts 2015). The reserves of the country also decline because of expenditure pressure and external debt consequently rises. This causes a deficit in the balance of payments of the economy. It is the record of all the economic transactions performed between countries with the other economies of the world. The external finance of the economy also runs out and a shortage of the external finance takes place because of the pressure of low funds. Refinancing, rescheduling of the financial items and expenses and other necessary adjustments are performed in orde r to counter the effects of deficit financing and other price rise created by political pressure. Credit ratings refer to the measurement of the ability of a debtor to fulfil his or her financial obligations based on their previous records and performance. It is an estimate of a person or an organisations potential to honour their financial commitments. The ratings cover a wide arena of public financial instruments. Any kind of debt or similar kind of obligations towards investors and creditors of institutional nature; e.g. bonds, debentures, securities, mortgaged securities, convertible bonds, medium and long term securities are some of these instruments which comes under the ratings preview. The credit rating industry is mainly dominated by the big three; Moodys Investor Service, Standard Poors, Fitch ratings. They asses the credit worthiness of various countries and organisation. Moodys gathers information required to evaluate risks, who might purchase or own a security, develops a conclusion on the appropriate rating in its committee, monitors the ratings and afterwards informs the marketplace about its ratings. While developing the ratings, a scale is followed starting from the top Aaa to the lower C The scale is divided into two parts consisting of investment and speculative grade (Moodys.com, 2018). Both of them helps to est imate the creditworthiness. SP follows an eight step procedure in their credit rating process. The steps include setting up a contract, pre-evaluation, followed by a management meeting, notification, rating committee meeting, analysis of committees ratings, publication and surveillance of rated issuers and issues (Kingsley, 2018). Fitch uses an almost similar procedure in preparing their credit ratings as that of Moodys and SP and use an ABC rating scale for their ratings specially for their Long term debt and an F rating for short term debts. In case of Sovereign rating criteria, a specific set of uniqueness creeps in while performance of credit than individual ratings. When sovereign credit ratings come into the picture, the credit worthiness of the governments are generally performed. These governments are considered as bearers of more authority and power than the other individual entities. These special powers include the ability to raise taxes, the power of controlling supply of money and the power of setting laws. It is because of these unique risks that these entities are very different form the individual entities. In such cases, the clause of willingness to default is also looked into (Paudyn 2013). In such cases, the creditors also have a very limited means of resorting to legal action against sovereign defaulters. Consequently, the judgements against sovereigns are also difficult to implement and be enforced upon. There are five major factors influencing sovereign ratings. They are institutional and governance e ffectiveness, structure of the economy and its growth prospects, investment position internationally, fiscal flexibility and performance along with burden of debt and monetary flexibility. Income levels, growth prospects and the diversity of the economy are some of the chief drivers of the economic assessment of the Sovereign bodies. The major factors which are the primary determinants of the external assessment are status of the sovereign countrys currency, the external liquidity and the countrys external position. External assessment is very important from the view point of these rating agencies as has been proved in the case of Iceland, where the fiscal indicators had failed to warn and gauge the future troubles of the economy of Iceland during the collapse of the banks in 2008. Monetary policy credibility is another major rating criterion which is keenly looked by Standard poor for its credit assessment of the various countries. Independence of the Monetary authority of a country, its price stability, effectiveness of the monetary policy tools, the level of development of the countrys capital and money markets are some of the most important factors which are looked into during the procedure of assessment of the credibility of monetary policies. The fiscal score which is another important determinant of sovereign ratings refers to the average of the fiscal flexibility and performance scores along with the debt score. Debt score assists in showcasing a sovereigns potential level of debt, the cost of the debts and the structure of the debts undertaken by the countries themselves. The various kinds of contingent liabilities and the monetary assessment also form a paramount part of the ratings study of the agencies. The importance of credit ratings can never be debated. It plays a significant role in any nations economic development. The ratings provided by the big three is pivotal for any countrys development. It provides superior and low cost information; it provides greater credence to the financial instruments and the countrys performance (Kingsley 2018). Most importantly it restores back the faith of the global financial community on the financial performance of the concerned country. References: Anon, 2018.Corporate Culture in Banking: Why It Matters. [online] Oxford Law Faculty. Available at: https://www.law.ox.ac.uk/business-law-blog/blog/2016/10/corporate-culture-banking-why-it-matters [Accessed 29 Mar. 2018]. Apps.olin.wustl.edu. (2018). [online] Available at: https://apps.olin.wustl.edu/faculty/thakor/Website%20Papers/BehavioralRiskManagement-FinancialServicesIndustry.pdf [Accessed 29 Mar. 2018]. Barth, A., 2017. Corporate Culture and Banking. Dermine, J., 2013. Bank corporate governance, beyond the global banking crisis.Financial Markets, Institutions Instruments,22(5), pp.259-281. Eaton, J., Kortum, S., Neiman, B. and Romalis, J., 2016. Trade and the global recession.American Economic Review,106(11), pp.3401-38. Juselius, M. and Takts, E., 2015. Can demography affect inflation and monetary policy?. Kingsley, P. (2018). How credit ratings agencies rule the world. [online] the Guardian. Available at: https://www.theguardian.com/business/2012/feb/15/credit-ratings-agencies-moodys [Accessed 29 Mar. 2018]. Moodys.com. (2018). Moody's - credit ratings, research, tools and analysis for the global capital markets. [online] Available at: https://www.moodys.com [Accessed 29 Mar. 2018]. Paudyn, B., 2013. Credit rating agencies and the sovereign debt crisis: Performing the politics of creditworthiness through risk and uncertainty.Review of International Political Economy,20(4), pp.788-818. Thakor, A., 2015. Corporate culture in banking.