January 10th, 2018
Financial acceleration and cross-boarder transmission of monetary policy
The role of financial factors in furthering economic shocks can be explained by assessing the impact of credit market frictions. The financial accelerator theory, for instance advances that during economic depressions, distortions in credit markets amplify the economic shocks (Bernanke, Gertler, & Gilchrist, 1999). This theory views that alterations that would have otherwise been limited are brown out of proportion in both severity and elongation due to deficiencies in credit and loan markets (House, 2006). By curtailing availability of funds to other sectors to fund expansion and other business operations, the distortions in the financial market would for instance lead to halting or scaling back of projects that would result into employment opportunities and revenue generation. The ideal situation however would be to regard credit imperfections as resulting into either more investment or less investment as determined by the available opportunities. Further, House (2006) demonstrates instances when distortions could have a stabilizing effect rather than an acceleration impact thus drawing implication for equilibrium between accelerator and stabilizer elements. This latter observation can be proposed to account for the observations of the positive impacts that have been witnessed in the U.S. economy following changes in the monetary policies (Boivin & Giannoni, 2003).
For multinational corporations a core concern would be whether monetary policies instituted in a given region would affect their operations in different regions. One study observes that shocks in the expansionary monetary policy in the United States leads to expansions in “the non-U.S., G-6 countries” resulting more from the “world real interest rate” than the existing balance of payments between these countries (Kim, 2001). Such positive spill over effects of one country’s monetary policy effect then means that multinational corporations are not exempt from impacts of one country’s monetary policy. The mechanisms through which the spill over effects operates could be thought of from its influence on the exchange rate. Such influences have been highlighted by Ireland (2005). As an example an increase in domestic nominal interest rate beyond that of its foreign complement could create. In such a scenario, for equilibrium to be achieved in the foreign exchange market, the domestic currency must steadily decrease in value at a rate that ensures the risk-adjusted returns on different debt instruments is equated (Ireland, 2005, p. 4). Failure of prices to achieve the required adjustment rate for such equilibrium to exist, results in goods produced in the domestic market being more expensive than those produced in foreign countries. This then leads to decrease in net exports, domestic output and employment levels (Ireland, 2005). Further high capital outflows may result from differences in exchange rates thus lead to an increasing trade imbalance. In the oil industry this would curtail the expenditure of individuals on industry products thus forcing industries to result into cost cutting measures to maintain a favorable performance. Monetary policy interventions that result into unfavorable exchange rates would thus increase oil prices and limit individual expenditure on oil products thus reducing industry performance that otherwise would help fund expansion activities. By its impacts on the exchange rate the monetary policy could lead to imports being cheaper hence more available in the short-term while in the long –term the return to equilibrium levels would result into increased exports (Kim 2001). The effect of this to a company wishing to source funding to expand into global markets would be in relation to where such funds are sourced. If the country where monetary policy has resulted into increased imports is the source of the funding, then the first phases of the expansion plans would be hindered by inadequacy of funds that could result from increased capital outflows. Go to the conclusion.