Understanding the interrelation between financial stability, macroprudential policy, and financial globalization requires a critical literature analysis of the different elements and factors affecting each element. Research by Wang et al. (2021) reveals a concrete interrelation between financial stability, macroprudential policy, and financial globalization for any company that has realized international expansion and even local companies.
Financial stability describes the capacity of a business, organization, or even country to function effectively without having to suffer tremendously from economic shocks that may emanate (Barra & Zotti, 2021). Stable financial systems can absorb shocks in the market without instituting adverse effects on the system members (Drobyazko et al., 2020). The system ensures that its economics continue to run smoothly. Apart from withstanding shocks, financial stability also entails the capacity of a country to conduct transactions with minimal interruptions and external impacts. Such was seen with the case of Russia, who were sanctioned by the U.S. after the war in Ukraine and thus faced interruptions in their attempt to make international transactions.
On the other hand, unstable financial systems tend to be indicated by extreme sensitivity to external shocks, increased debt, reduced reserves, account deficits, and exchange rate misevaluation (Albuquerque & Rajhi, 2019). Numerous developing countries have financial instability, with a majority of this instability incepting from globalization and their Macroprudential policies (Ely et al., 2021). Financial globalization is among the most common and impactful factors affecting financial stability.
The intricate relationship between financial stability and globalization relates to the inception of modern technology and the current rise in popularity of the global market. Financial systems such as the IMF and the World Bank have come up to synchronize international transactions and provide global loans to various countries worldwide. The potential benefits of financial globalization have attracted numerous countries to its models of operations. Tesega (2022) states countries with higher levels of financial globalization will also have more advanced financial systems.” Financial globalization has allowed for the flow of resources and finances between countries, but more so from developed nations to developing countries (Tesega, 2022). Numerous countries, especially those still developing, have been influenced to join the international financial systems. This measure has also realized tremendous financial instability in those countries, especially those that have fallen on the wrong side of the international financial system. Research by Biglaiser & McGauvran (2022) revealed that most developing countries have taken excessive loans from the IMF and the world bank in recent years, leading them to dept crippling their economies. Countries like Ghana have fallen short of their dollar reserves, which has had tremendous implications regarding matters of oil purchase.
Financial globalization helped institute the dollar as the global reserve currency. While this has had tremendous benefits for the U.S., it has been deleterious to most countries, especially poor ones (Qi et al., 2021). A small change in the dollar’s value or a recession only within the United States immediately affects the rest of the world (Fried, 2023). Those countries whose value against the dollar is minute have ended up suffering tremendously from any impacts that affect the dollar. Bhanumurthy and Kumawat (2020) researched the risks and benefits of financial globalization and revealed that it could lead to “crises and contagion,” which can destabilize the financial sector of a nation. Different research by Majeed et al. (2022) revealed that globalization, while enhancing the efficiency of financial systems and risk sharing, also allows for the transfer of economic shocks, liquidity, and solvents, which can be especially deleterious to countries that are still developing and with insufficient muscle to counter those shocks.
Use of macroprudential policies in the interrelation between financial stability and globalization
Macroprudential policies come into the picture of this interrelation as a remedy against the deleterious side of financial globalization. Research by Buckley et al. (2020) associates the number of macroprudential policies with instances of financial stability in different countries. Most macroprudential policies are instituted due to panic against financial instability as they are developed to help ensure financial stability. As such, they help limit the systemic risks that may emanate from the globalization described above. It helps ensure resilience, minimize vulnerabilities, and control increases in vulnerabilities for a financial system, making it more stable (Bakir, 2019). Different countries and businesses have different macroprudential policy bases. For instance, the European Systemic Risk Board and the European Banking Authority provide a majority of macroprudential policies for countries within the EU (Stellinga, 2019).
Bakir (2019) researched how macroprudential policies in developing worlds affect financial stability in the countries and revealed that a majority of developing nations have realized increased and excess credit growth that has aggressed their account deficits, rendering more and more developing countries in the vicious cycle of debt to remain afloat. Martinez-Miera Repullo (2019) researched to determine the impacts of macroprudential policies on financial stability and realized that macroprudential policies increase the social welfare of a society. As such, Macroprudential policies have been realized to have tremendous impacts on the financial stability of a company or business (Chen et al., 2023).
References
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Barra, C., & Zotti, R. (2021). Financial Stability and local economic development: The experience of Italian labor market areas. Empirical Economics, 62(4), 1951–1979. https://doi.org/10.1007/s00181-021-02071-x
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Biglaiser, G., & McGauvran, R. J. (2022). The effects of IMF loan conditions on poverty in the developing world. Journal of International Relations and Development, 25(3), 806–833. https://doi.org/10.1057/s41268-022-00263-1
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