Financial Markets and Institutions Assignment February 2015

Financial Markets and Institutions February 2015 - Assignment Example ging in the discussion, it is important to note that the role of the central bank and the extent of its involvement may vary according to the presence of different stakeholders and varying legislations. For instance, the US central bank does not regulate the financial sector while on the other hand other governmental parts have to approve the intervention measures of Japan’s central bank. This paper outlines the importance of publications of the central bank and related forecasts of the macroeconomic trends of an economy. The paper shows that information and views of the central bank are important to stakeholders such as forecasting agencies and market players. Different economists agree that the pivotal role of the central bank is macroeconomic stabilization. The macroeconomic stabilisation role involves the central bank keeping in check the exchange rate, price levels, and payment systems in the domestic market. Overdependence on business cycles as well as operations of multinational enterprises in the domestic market may pose a serious financial threat to an economy. These factors may distort prices, including foreign exchange rates and interest rates, which can create insolvency, severe fluctuations, and disruption of the domestic economy. For an economy to achieve economic development there has to be financial stability otherwise, the economy will become fragile, reduce agent’s confidence, and cause moral hazards. The lack of financial stability leads to borrowers obtaining lower wealth than normal proceeds from an investment project. On the other hand, low agent confidence and the unpredictability of future trends may bore higher agency costs and undermine the performance of the investment sector. Driffill et al (2003) agree that financial stability and monetary policy go hand in hand. Driffill et al (2003) base this argument on the fact that the activities of the central bank aim at stabilising price fluctuations and smoothing interest rates, which is