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Regulation:
Command and Control
Involve the imposition of differentcriminal sanctions.
Benefits:
- Clear and strong sanctions against certain unwanted acts
- Strong political act using law to support public.
Problems:
- Potential for regulatory capture
- Legalism - growth of complex rules
- Enforcement of law can be expensive and complex.
Self-regulation
- Common in the professions
- Cheap and has a high commitment of firms
- distrust
- enforcement difficult
Incentive-based regimes
- use of economic incentives
- i.e. subsidies, taxes
- these approaches to not demand enforcement or monitoring, and hence no regulators.
- Easily avoided or ignored
- These incentives may take a very long time to become affective and impact hard to predict.
Central Bank: key roles
Open Market Operations
Involves a central bank selling or buying government debt to/from the private sector to increase or reduce short term interest rates.
=> CB sells govt securities the MS decreaes, I increases.
=> CB buys govt securities the MS increases, I decreases.
Other forms of monetary policy
Special deposits:
Moral suasion: CB will make informal requests to alter bank behaviour (often over lunch)
Direct controls over interest rates
Expansionary Monetary Policy
Contractionary Monetary Policy
Expansionary:
- open market purchases by CB
- discount rate decreases
- reserve requirement ratio decreases
Note: the application of monetary policy has become more challenging due to growth in number of financial firms, and the amount of "hot money" flowing from one financial system to the next. (due to hedge funds and internationalisation due to liberalisation).
CB: The Lender of Last Resort
This may encourage moral hazard, as banks which are "too big to fail" act recklessly knowing the CB will bail them out.
International Roles
Future for Central Banks (CBs)
Internationalisation of financial markets has made it difficult to control inflation in last 20 years.
CBs reluctant to intervene with price bubbles because they believe the market is efficient, and that intervention would be ineffective.
In the future, CBs must ensure financial stability more robustly through regulation and commentary on events.
New polocy tools: quantitive easing & TARP fund of Fed.
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