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
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