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Financial Instability - Financial instability The rising...

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Financial instability The rising volume of international finance and increased interdependence in recent decades has raised concerns about the volatility and the threat of a financial crisis. This has led many to investigate and analyze the origin, transmission, effects and financial policies to prevent instability. This paper argues that financial liberalization and speculation explanations are more reflective of instability in financial markets and that financial instability is likely to be transmitted globally with a long implications for real sector performance. I conclude the paper with the argument that a global transaction tax would be the most effective policy reduce financial instability and other policy proposals aimed at areas and the creation of a supranational institution, are not viable or unattainable. INSTABILITY IN THE FINANCIAL MARKETS In this section we discuss four different interpretations of how financial The instability is presented. First interpretation deals with speculation and later "bandwagon" of financial markets. The second is a policy interpretation of dealing with the state of reduced hegemonic anchor financial system. The question of whether regulation of the causes or mitigates financial instability rises the third interpretation, while the fourth view refers to the "trigger points" phenomena. To fully understand these interpretations, we must first understand and differentiate between a "money" and the crisis of "contagion." A currency crisis refers to a situation that is a loss of confidence in the currency of a country causes capital flight. Instead, a crisis of infection refers to a loss of confidence in assets denominated in a particular currency and the subsequent global transmission of this shock. One of the most fundamental reading of financial instability refers to speculation. Speculation is displayed in a situation where a government monetary or fiscal policy (or action) leads investors to believe that the currency of that particular country either appreciate or depreciate in terms relationship with other countries. Closely related to these speculative attacks is what is coined the "bandwagon" effect. Say, for example, that a central bank decides to conduct an expansionary monetary policy. A neoclassical interpretation tells us that this will reduce the national interest rates, which decreases the rate of return on the foreign exchange market and causing a depreciation of the currency. Because investors expect to happen is likely to take before depreciation perceived. "Efforts to obtain out would accelerate the loss of reserves, which caused a collapse before speculators, therefore, try to get out even earlier, and so on "(Krugman, 1991:93). This "herd" or effect "car" naturally cause abrupt changes in exchange rates and volatility in the markets.
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Another argument for the evolution of financial market instability is closely related to the theory of hegemonic stability. This political explanation
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