international finance essay topics

international finance essay topics

International Finance Essay Topics

1. Introduction

Given this, it is appropriate that such global interactions receive a modern treatment in economic and finance research. However, since research in international finance holds as a basic tenet that foreign trade improves national welfare, we must understand why this remains true when the existence of efficient diversification opportunities is summarily dismissed. The answer appears to be that the traditional argument for free trade – that it maximizes the volume of foreign trade – remains intact while diversification efficiency remains merely an enabling condition crucial for achieving global welfare. However, if this is the case, it is an argument for maximizing the volume of foreign trade rather than one for maximizing the volume of global trade because, irrespective of how or where it trades, consumers as a whole can achieve diversification entirely through consumption if global trade’s volume optimality is satisfied.

A rich body of research in international finance has improved our understanding of these issues by explaining how real variables aggregate to produce exchange rate changes. Of particular importance is research on the forward discount puzzle, the contribution of uncovered interest parity in explaining exchange rate changes, and the role of news and forward-looking behavior in exchange rate determination.

While research in international finance has improved understanding of the determinants of exchange rates, it has not fulfilled its potential in two areas. Research should focus more attention on identifying market failures to clarify the circumstances under which the government should intervene, and researchers should make greater efforts to preserve the global welfare gains from trade to avoid leaving the policy prescription unchanged when disturbing new results.

2. The Impact of Exchange Rates on International Trade

According to the Eleventh Draft Midterm Plan (1987-9), trade is considered as the engine of economic growth, which is placed at the highest priority to industrialize the five-year plan. Therefore, the government should orient the management of exchange rates to boost exports since this is effectively the quickest channel of transmitting monetary changes and has implications on export sales either directly or indirectly. Moreover, as Singapore has limited resources, she does not have the money to finance her own capital projects and technical expertise. Given this situation, the government should attract investment funds and encourage foreign technology through a fair and judicious exchange rate management.

A country’s exchange rate, the price of its currency in terms of those of other countries, plays a pivotal role in international trade. The exchange rate influences the business cycle, in several instances as a measure of competitiveness, affecting terms of trade. Its level and movements in the market also have an effect on the country’s capital market and effects on portfolio investment abroad. This makes it imperative for countries, especially developing ones with a significant reliance on trade such as those within the South East Asian bloc, to handle exchange rates with caution. An unmanaged fluctuation can lead to several repercussions on the economy including external sector instability. Thus, the reserve bank for South Asian countries should augment its intervention and regulate the exchange rate market, either directly or indirectly through its impact on the monetary base so as to not allow the all-prevailing negative sentiments of the financial markets adversely hit the currency or the local physical market.

3. The Role of International Financial Institutions in Economic Development

This is very important, especially since stimulating business is crucial in helping recession turn to expansion, since it is widely accepted that resorting to budgetary policies or, worse, inviting politicians to allocate basic investment and production in the economy, and the unintended, distortionary consequences could be spectacular. The importance of finding the real cause of the current investment slump in order to develop a proper perspective that it does not simply disappear on its own is driven by the fact that there is an enormous tenet of policy proposals that have come forward to address stagnating business investments.

To begin, in analyzing and comparing the role of the private and public sectors in creating economic growth, it is important to consider different situations where one factor is pivotal in expansionary periods and the realignment of the other resolves downturns. For example, there is a widely accepted perception as to why business investment is generally the driving force behind working the economy out of a downturn. Other circumstances may also arise, certainly they did in the current cycle. Basically, where the public sector, i.e., business investment, would follow in normal cycles, there appears to be some other irrationality in investor psychology and business confidence which is causing investments to languish below what we might expect given cyclical size and lay underpinnings.

4. The Effects of Globalization on Financial Markets

Second, financial globalization has led to increasing financial sector integration across countries. The greater integrations among global financial markets are now at the center of the debate on international macro policy and in particular the use of monetary policy to influence both domestic economic activity and exchange rate movements. Central bank policies are more powerful in this environment. To answer this question, we require an analytic framework which ties together the effects of global integration of financial markets with the monetary autonomy of national monetary policy in the member countries. We developed it by adding to a simple textbook IS-LM model. Indeed, this model is theoretically very appealing and it seems to be consistent with the data. Although we replicated the work, some data-orchestrated catch-up growth of emerging market economies counterbalances the effects in larger economies.

Over the past few years, an explosion of research influenced by international asset pricing models has provided empirical insights on the role of these factors in foreign exchange markets. The current received view is that national policy has long-term effects on foreign exchange markets. More recently, researchers have been particularly interested in the potentially longer-term effects on exchange rates and other asset markets of government policy towards financial markets, and of particular government policies aimed at influencing foreign exchange markets and capital controls.

The globalization of financial markets and its effects on exchange rates are of considerable policy interest. Policymakers must form working assumptions about the effects of their policies on international asset markets, and these markets are influenced by many factors that either reinforce or offset the impact of any single policy. Interest rates, exchange rates, and prices are influenced by changes in the relative demand for goods, money, and assets. Such changes can be caused by national policy decisions, random shifts in preferences calculated to optimize subjective well-being or government policy goals.

5. Government Intervention in International Finance

Intervention in foreign exchange markets is important for the identification of speculative behavior because it is the policy actions of the government that might provide evidence that the economy’s exchange rate has deviated from its fundamental value. If the spot exchange rate is constantly at its fundamental value, then the only defense that the government can mount against “disorderly” markets is the force of its reputation in the market, not through actual trades. At any point in time there is a difference between the actual exchange rate on the foreign exchange market and the nominal exchange rate that satisfies the theory of exchange rate determination as expressed in the interest rate parity equation.

With the exception of country risk, exchange rates and associated interest rates, as well as the shares and derivative securities related to those rates, should be the same whether they are measured onshore or offshore. This chapter examines why that parity condition might fail and what sorts of government intervention in financial markets may be justified as a way of reducing these failures. Government intervention in foreign exchange markets is examined even though such activity would not be necessary if the competing currency rate was adopted as an alternative to floating exchange rates. Governments clearly intervene in the foreign exchange market. The policy questions concern why they intervene and under what circumstances (defensive or pro-active in nature) such intervention is justifiable.