Main Trends in International Capital Flows - Assignment Example

Interest rates were pushed down through conventional and non-conventional measures. A conventional measure is a state where the central bank of a given state is not directly involved in lending funds to the government or other financial institutions; neither does it directly buy any type of debt instruments in the market. They can manage the level of interest rates, thus managing liquidity and in long run; prices are stabilized in the market. Unconventional measures refer to policies that aim at the cost and accessibility of outside finance to other stakeholders like households and non-financial companies. With rates significantly brought down, investors had sufficient funds and they had to look elsewhere to invest.

These trends later occurred to cause problems as this was supposed to happen when inflation is at the lowest level possible under a depressed economy. The economic shock was strong such that it affected the economy and further cutting down of interest was not possible leading to firms resulting in unconventional policy which even when transmission process of monetary is impaired, it may be warranted

1. Reasons for financial bubbles

In 1997-1998, investors lost confidence in the Asian market since the resulting returns were very low and had brought them server loss. This censed financial crisis in the potential market, investors could no longer join the market as it was initially who later affected the world economy. Secondly, in Asian countries and other new markets, many firms had huge debts in dollars, when their currency failed; it became a major problem as debts rose significantly. It has been an ongoing challenge in international business though currently is not serious like it was during that time.

2. Opinion on
3. Global importance of crisis in emerging markets

Yes, this is because for business to go on smoothly there is a need to understand the market you are entering. The potential crisis is therefore of paramount importance for any firm to understand before venturing into the market.

1. Fundamentals of financial bubbles

Yes, speculating how financial market will or may look like may help investors determine the possible extent of returns they expect or warn them against investment when it is not looking good.