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Does globalisation of world fianancial markets make international deversification of portfolios more or less desirable - Essay Example
There were many discussions regarding the benefits and detrimental consequences f financial liberalizations, however the issue is still subject to continuous debates and no ultimate solution have been reached at. The main issue f the debate is that there are significant positive effects f international capital surges into developing economies, but negative consequences can quickly overshadow these benefits if short-term inflows are allowed to reach unsustainable levels…
Portfolio investment encompasses trade in securities like stocks, bonds, bank loans, derivatives, and various forms f credit (commercial, financial, guarantees). Direct investment involves the purchase f real estate, production facilities, or substantial equity investment. To answer the question whether financial liberalization is good or bad we need to analyze arguments given by both opponents and proponents f financial liberalization. First we will consider arguments against financial liberalization followed by arguments supporting the view f financial liberalization.
Research finding proving the detrimental effect f liberalization on the financial system. The Wyplosz research paper says that the evidence based on studies f the experience with liberalization in a sample f 27 developing and developed economies seems to be converging to the view that liberalization contributes to both banking and currency crisis.
A study by Eichengreen, Andrew Rose and Wyplosz (1995) found that the presence f capital controls reduces the possibility f a currency crisis. ...