Literature Review: Interrelationship Financial Stability, Macroprudential Policy and Financial Globalization

2.0: Literature review

Financial Stability and Macroprudential Policy

Understanding the nature, mode, and interaction mechanism between financial stability and macroprudential policies has taken time to examine and assess thoroughly. Macroprudential policies are often viewed as countercyclical capital buffers (Martinez, 2019). They help provide grey areas and sufficient ground for economic shocks during the expansion of different countries. These policies have been revealed as critical to most superpower economies, facilitating their tremendous growth and development during the Industrial Revolution (Touny et al., 2019). The ultimate goal of macroprudential policies is to minimize financial crises and enhance financial stability. Despite this imminent goal, understanding the intricate point of interaction and association between macroprudential policies and financial stability is yet to be fully understood (Chen et al., 2023).

Macroprudential policies have been associated with instances of financial instability in different countries that are still underdeveloped (Buckley et al., 2020). These policies help limit the systemic risks emanating from the globalization described above (Buckley et al., 2020). These policies help enhance the stability of significant corporations worldwide (Chai et al., 2022). The inception and spike in the interest in macroprudential policies as a distinct assessment area has been a recent factor in describing the interrelation between stability and macroprudential policies (Bakir et al., 2019).

Growth in the global economy and GDP has fueled interest in the role of macroprudential policies, especially concerning its impact on financial stability. This is because macroprudential policies historically have instituted both positive and negative results. The need for macroprudential policies is to remedy financial instability in counties or specific corporations (Stellinga, 2019; Filho & Ng, 2023). Despite the numerous benefits of macroprudential policies toward financial stability, they can also threaten economic stability (Yin, 2019). Macroprudential policies set by larger economies constitute spillover effects that trickle down to other nations and lead to economic instabilities (Rochelle et al., 2022). Spillover effects emanate from macroprudential policies instituted by larger economies and deleterious impacts on developing nations’ financial stability in Africa and Asia (Majeed et al., 2022; Oanh et al., 2023).

Financial stability and financial globalization

The effects of macroprudential policies on financial stability can only be discussed with the issue of financial globalization being assessed. The association between financial globalization and financial stability is a complex affair. Financial globalization is the process through which several financial institutions in different countries associate and interconnect, primarily through foreign lending, foreign investment, or cross-border financial cashflow (Ocampo et al., 2000; Tesega, 2022; Oanh et al. (2023). Numerous factors fuel the growth of financial globalization, including the growth of technology that allows for global transactions and service exchange, increasing the availability of human capital, and the sharing of a global market (Yin, 2019). Financial globalization has positively and negatively impacted different countries (Ocampo et al., 2000).

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 (Chai et al. (2022). Numerous assessments, however, agree that financial globalization leads to an increased risk of financial stability (Bussière et al., 2020; Drobyazko et al., 2020; Çelik & Oğuş Binatlı, 2022). This risk comes from over-dependence on specific currencies and countries that tend to supply most of the world’s products and needs (Biglaiser & McGauvran, 2022).

Globalization might be the source of financial instabilities across different country economies worldwide (Moe, 2018). Friedline et al. (2020) hypothesized that the inception of financial globalization is to blame for most current instabilities in the economies of developing nations worldwide. A different assessment by Oanh et al. (2023) revealed that financial globalization was made possible by institutionalizing the dollar as the global reserve currency. The dollar as a reserve currency helps facilitate financial globalization by allowing transactions across different countries and thus remains the most valuable country Albuquerque & Rajhi, (2019); Barra & Zotti, (2021); Ely et al., (2021). As such, the dollar’s value has a role in financial globalization and the institutions but came to help facilitate this dominance and streamline transactions (Özmen & Taşdemir, 2023). This instituted reliance on one country’s currency has been associated with imminent financial instabilities in nations like Cuba as it can be weaponized, and the weapon is effective courtesy of financial globalization (Kranke, 2019). A concrete interrelation between financial stability, macroprudential policy, and financial globalization for any company that has realized international expansion and even local companies (Wang et al., 2021).

Financial globalization and macroprudential policy

With the positive and negative impacts of financial globalization made potent, interest in macroprudential policies and how they can be used to help cushion financial stability from financial globalization became potent (Qi et al., 2021). This element was discovered by numerous already-developed countries, which incepted laws and regulations that manage their finances and help prevent potent financial instability that may emanate from financial globalization (Agénor & Pereira da Silva (2021).

There has been an exponential rise in the quest for knowledge and understanding of macroprudential policies and how they function to cushion against instabilities emanating from financial globalization (Bhanumurthy and Kumawat (2020). These policies have especially realized a recent surge after the global financial crisis 2007 that instituted the need for policies capable of cushioning companies, citizens, and businesses from financial instabilities from financial globalization (Piroska et al., 2020). Macroprudential policies remedy the imminent impacts of financial globalization (Prasad et al., 2003; Biglaiser McGauvran, 2022; Fried, 2023). Macroprudential policies help provide countermeasures against the deleterious financial instability instituted by financial globalization (Cao & Dinger, 2022), (Chai et al., 2022).

References

Agénor, P.-R., & Pereira da Silva, L. A. (2021). Financial spillovers, spillbacks, and the scope for International Macroprudential Policy Coordination. International Economics and Economic Policy, 19(1), 79–127. https://doi.org/10.1007/s10368-021-00522-5

Albuquerque, P. H., & Rajhi, W. (2019). Banking stability, natural disasters, and state fragility: Panel VAR evidence from developing countries. Research in International Business and Finance, 50, 430–443. https://doi.org/10.1016/j.ribaf.2019.06.001

Bakir, C. (2019). Actions, contexts, mechanisms, and outcomes in macroprudential policy design and implementation. Public Policy and Administration, 36(2), 205–231. https://doi.org/10.1177/0952076719827057

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

Bhanumurthy, N. R., & Kumawat, L. (2020). Financial globalization and economic growth in South Asia. South Asia Economic Journal, 21(1), 31–57. https://doi.org/10.1177/1391561420909007

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

Buckley, R. P., Avgouleas, E., & Arner, D. W. (2020). Three decades of international financial crises: What have we learned and what still needs to be done? SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3644206

Bussière, M., Cao, J., de Haan, J., Hills, R., Lloyd, S., Meunier, B., Pedrono, J., Reinhardt, D., Sinha, S., Sowerbutts, R., & Styrin, K. (2020). The interaction between macroprudential policy and monetary policy: Overview. Review of International Economics, 29(1), 1–19. https://doi.org/10.1111/roie.12505

Cao, J., & Dinger, V. (2022). Financial globalization and bank lending: The Limits of Domestic Monetary Policy. Journal of Financial and Quantitative Analysis, 57(8), 3223–3251. https://doi.org/10.1017/s0022109022000539

Celik, M., & Oğuş Binatlı, A. (2022). How effective are macroprudential policy instruments? Evidence from Turkey. Economies, 10(4), 76. https://doi.org/10.3390/economies10040076

Chai, Z., Sadiq, M. N., Ali, N., Malik, M., & Hamid, S. A. (2022). Bank specific risks and Financial Stability Nexus: Evidence from Pakistan. Frontiers in Psychology, 13. https://doi.org/10.3389/fpsyg.2022.909141

Chen, M., Zhu, H., Sun, Y., & Jin, R. (2023). The impact of housing macroprudential policy on firm Innovation: Empirical Evidence from China. Humanities and Social Sciences Communications, 10(1). https://doi.org/10.1057/s41599-023-02010-4

Drobyazko, S., Barwinska-Malajowicz, A., Slusarczyk, B., Chubukova, O., & Bielialov, T. (2020). Risk management in the system of financial stability of the service enterprise. Journal of Risk and Financial Management, 13(12), 300. https://doi.org/10.3390/jrfm13120300

Ely, R. A., Tabak, B. M., & Teixeira, A. M. (2021). The transmission mechanisms of macroprudential policies on Bank Risk. Economic Modelling, 94, 598–630. https://doi.org/10.1016/j.econmod.2020.02.005

Filho, I. E. de C., & Ng, D. (2023, January 20). Macroprudential policies in response to external financial shocks. IMF. https://www.imf.org/en/Publications/WP/Issues/2023/01/20/Macroprudential-Policies-in-Response-to-External-Financial-Shocks-528086

Fried, D. (2023). The U.S. dollar as an international currency and its economic effects. https://www.cbo.gov/system/files/2023-04/58764.pdf

Friedline, T., Chen, Z., & Morrow, S. (2020). Families’ Financial Stress & Well-being: The importance of the economy and Economic Environments. Journal of Family and Economic Issues, 42(S1), 34–51. https://doi.org/10.1007/s10834-020-09694-9

Kranke, M. (2019). imf‐world bank cooperation before and after the global financial crisis. Global Policy, 11(1), 15–25. https://doi.org/10.1111/1758-5899.12743

Majeed, A., Ahmad, M., Rasheed, M. F., Khan, M. K., Popp, J., & Oláh, J. (2022). The dynamic impact of financial globalization, environmental innovations and energy productivity on renewable energy consumption: Evidence from advanced panel techniques. Frontiers in Environmental Science, p. 10. https://doi.org/10.3389/fenvs.2022.894857

Martinez-Miera, D., & Repullo, R. (2019). Monetary policy, macroprudential policy, and financial stability. Annual Review of Economics, 11(1), 809–832. https://doi.org/10.1146/annurev-economics-080218-025625

Oanh, T. T., Van, L. T., & Dinh, L. Q. (2023). Relationship between financial inclusion, monetary policy, and Financial Stability: An analysis of countries with high and low financial development. Heliyon, 9(6). https://doi.org/10.1016/j.heliyon.2023.e16647

Ocampo, J. A., Zamagni, S., & Pietrobelli, C. (2000). FINANCIAL GLOBALIZATION AND THE EMERGING ECONOMIES. Google. https://chrome.google.com/webstore/detail/adobe-acrobat-pdf-edit-co/efaidnbmnnnibpcajpcglclefindmkaj?hl=en-GB

Ozmen, E., & Taşdemir, F. (2023). Exchange rate regimes as thresholds: The main determinants of capital inflows in emerging market economies. Borsa Istanbul Review. https://doi.org/10.1016/j.bir.2023.08.003

Piroska, D., Gorelkina, Y., & Johnson, J. (2020). Macroprudential policy on an uneven playing field: Supranational regulation and domestic politics in the E.U.’s dependent market economies. JCMS: Journal of Common Market Studies, 59(3), 497–517. https://doi.org/10.1111/jcms.13097

Prasad, E. S., Rogoff, K., Wei, S.-J., & Kose, A. (2003). Effects of financial globalization on developing countries: Some empirical evidence — IMF occasional paper no. 220. International Monetary Fund. https://www.imf.org/external/pubs/nft/op/220/

Qi, X.-Z., Ning, Z., & Qin, M. (2021). Economic policy uncertainty, investor sentiment, and financial stability—an empirical study based on the time-varying parameter-vector autoregression model. Journal of Economic Interaction and Coordination, 17(3), 779–799. https://doi.org/10.1007/s11403-021-00342-5

Rochelle M. Edge, N. L., Donald Kohn, N. L., Sheiner, L., Michael D. Bauer, E. A. O., & Sam Boocker, M. N. (2022, March 9). What are macroprudential tools? Brookings. https://www.brookings.edu/articles/what-are-macroprudential-tools/

Stellinga, B. (2019, August 5). The open-endedness of macroprudential policy. Endogenous risks as an obstacle to countercyclical financial regulation: Business and Politics. Cambridge Core. https://www.cambridge.org/core/journals/business-and-politics/article/openendedness-of-macroprudential-policy-endogenous-risks-as-an-obstacle-to-countercyclical-financial-regulation/56EAD90FA2663F671B798D1C8AE26D23

Tesega, M. (2022). Does financial globalization contribute to financial development in developing countries? Evidence from Africa. Heliyon, 8(10). https://doi.org/10.1016/j.heliyon.2022.e10974

Touny, M. A., Qamar, K. A., Abed, E. L. A., Sayed, M. N., & Abed, A. L. A. (2019). Recent Trends in Financial Globalization and Psychology of Investment in Financial Markets, 14(24), 4548–4551.

Wang, C., Wang, D., Abbas, J., Duan, K., & Mubeen, R. (2021). Global Financial Crisis, Smart Lockdown Strategies, and the COVID-19 spillover impact: A global perspective implications from Southeast Asia. Frontiers in Psychiatry, p. 12. https://doi.org/10.3389/fpsyt.2021.643783

Yin, H. (2019). Bank globalization and Financial Stability: International evidence. Research in International Business and Finance, pp. 49, 207–224. https://doi.org/10.1016/j.ribaf.2019.03.009