Ekonomika

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In this article called " Global Financial Instability framework, events and issues" by Frederic Mishikin, he states that global economy has experienced severe bouts of financial instability in the last five years, and that these instabilities have had devastating impact on crisis in countries. For example in Mexico GDP fell from 4% to6%. In Asian countries like Korea and Indonesia it fell from above 5% to below5%. So the key questions that today's policy makers face are how to reduce risk of global financial instability and how to show how economic instability damages economic activity. As for the question of why financial instability occurs, Mishikn offers several key contributors to this phenomenon. Deterioration in financial sector balance sheets, increases in interest rates, increases in uncertainty and deterioration in non-financial balance sheets. Deterioration in financial sector balance sheets causes banks to have substantial contraction in their capital so they can either cut back on their lending or they can try to raise new capital. Since it is hard to raise the new capital at low cost, they are forced to contract their lending which slows down economic activity and in some sever cases can lead to banks panic. Increase in interest rates can have negative effect on banks balance sheet, directly causing a decline in net worth of their assets. During increased uncertainty it is harder for lenders to screen good credit risks from bed ones and this leads to different moral hazards that slow down economic activity. Most critical factor of the all is deterioration in non-financial balance sheets. If borrowers suffer a widespread deterioration of balance sheets, it worseness both adverse selection and moral hazard problems in financial system. In conclusion Mishkin states that in order to promote soundness and safety of financial system is crucial to prevent future financial instability. This can be achieved trough economic policies in both international and domestic financial systems.

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