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Globalization of Financial Markets

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Leon Wang

on 25 June 2013

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Transcript of Globalization of Financial Markets

Globalization and Financial Markets
What is Globalization?
History of Globalization
- Generally there has been a slow, jumpy trend towards more globalization
- From around the 1800's to 1914, globalization was on a steady rise (Gold standard, increased convenience of transportation)
- WWI halts and reverses globalization- gold standard was abandoned

Capital Flow
Interest Rates
Stock of Foreign Capital
How is it measured?
- Refers to the economical interdependence of countries on each other
- The transfer of good, services, investments, and capital across borders
- Import, exports, immigration, investments
- Division of labor/ specification
- Advantages and disadvantages

- Measures the capital flow from one Country to the next
- Most direct method
- Measures the difference in interest rates between countries
- The smaller the difference the more globalized the countries are
- Countries will significant trade-barrios are most likely to have different interest rates
- People in free trading-countries will seek lower interest rates in other countries if there is difference --> Equilibrium
- Measures the stock of foreign capital every country holds
- The more globalized the economy, the more foreign capital each country will hold at each giving time
History of Globalization cont.
- WWII and the great depression furthur reversed globalization as countries lost trust in one another
- Dependence on other countries was also seen as a weakness
- However, recently globalization has been increasing dramatically due to many factors
- Technology
- Specialization (Economies of Scale)
- Deregulation




Advantages of Financial Globalization
More Opportunities
- Trade, by nature, increases the efficiency of the global economy as a whole
- Globalization of financial markets
- Comparative Advantages
- More investment opportunities
- free play of market mechanisms decreases excessive risk taking
- More opportunity for investments
Easing of Fluctuations
- The flow of free capital, just like with free trade, would encourage governments to pursue better fiscal and monetary policy
- Countries can transition to another good's market if the current one fails
- Ex. if lyntopia had a drought that destroyed most of the agriculture

- Instead of staving, the farmers could go work in factories and sell the product to other countries
- Could also be viewed as a disadvantage
Political Stability
- Promotes peace and understanding, countries are less inclined to attack each other if they are dependent on trade
- Countries are less dependent in all aspects, international trade can be used as a bargaining chip in diplomatic issues
- ex. Iran, North Korea
Economic Development/ Poverty
-Financial Globalization accelerates economic development, especially in developing countries, more investments etc.
- Developed countries invest in developing countries in order to capture new markets
- More rapid spreading of technological advances and financial innovation
- Helps improve infrastructure to international levels
Financial Markets
- A place where financial capital is exchanged
- The raising of capital ex. capital markets
- The transfer of risk ex. derivatives markets
- Price discovery
- Global transactions with integration of financial markets
- The transfer of liquidity ex. money market

- Typically mostly financial assets, but some commodities, such as precious metals are also traded

Globalization of Financial Markets
- Globalization of all other aspects of the economy . --> globalization of the financial markets

- Absolute value of the ratio of current account balance over GDP, averaged across a number of countries
- Law of One Price
- "Bid-Ask" Difference
- Absence of opportunities of arbitrage across borders "Marketing"
Capital Mobility
The free movement of capital from country to country has similar effects as free trade on the global economy

- Global savings to be allocated more efficiently, more options for investment
- More competition for both borrowers and lenders, people make smarter decisions
- Channel resources to the most productive uses
History Of the Monetary System
The Gold Standard
(1875-1944)
- The currency unit can be freely converted into fixed amounts of gold and vice versa.


- The exchange rate is determined by the economic difference for an ounce of gold between two currencies.


Ex) 1ounce of gold = $ 35, ¥7

→ Exchange rate = 5 $ /¥



The Gold Standard
(cont.)
• Highly stable exchange rate promoted international trade & investment

• Imbalance of exchange rate and trade could be naturally corrected

• Because of capital mobility, a country’s economic management enslaved to other countries’ monetary policies

• Failure of gold standard: shortage of gold



Bretton Woods System
1945 ~ 1972
- 44 countries made an agreement in 1944.
- To rebuild international monetary system after WWII & Great Depression.
- To stabilize FX market and promote trade
- U.S. dollar pegged to gold(= $35/ounce) and other currencies pegged to U.S. dollar.
- IMF and World Bank were established




Bretton Woods System
1945 ~ 1972
- Collapse of Bretton Woods system
- 1960’s : Vietnam War & rapid economic growth in Europe and Asia → U.S. become to run deficits.
- 1970’s : oil shocks & stagflation → inflation, unemployment of developed countries
- 1971 : Nixon shock “Close the gold window”





Kingston System
1976 ~ present
- IMF members made new international currency cooperation system in Kingston.
- Countries can choose exchange rate system by themselves
- Fixed vs. Flexible exchange rate regimes
- Gov’t can intervene to relieve volatility of exch. rates but cannot manipulate exch. rates.
- Key currency : SDR(Special Drawing Rights)




Negative Aspects of Finance Globalization
“Fundamental problem is the excessive mobility of private financial capital.”
~James Tobin, 1978

- Significant amounts of foreign lending
- Explosion of productivity
- Policy reformation
- High level of future income

- Outflow of foreign finance

- Interest rate shoot up

- The currency collapses

- Firms face a credit crunch

- Tight fiscal policies


The Asian Currency Crisis
Run on the Bank
A situation that occurs when a large number of bank or other financial institution's customers withdraw their deposits simultaneously due to “fear” that the bank will be bankrupt.


Leon Wang, Seongsun Yi, Minik Jo
Full transcript