Monetary policy Research Paper Example | Topics and Well Written Essays - 1750 words

Monetary policy - Research Paper Example It lays a vital role in opening up the financial market of a country. It also has supervisory powers, aimed at limiting banks and financial intermediaries from reckless behaviour. In developed nations Central banks are independent so that they operate under rules made to help them operate in a political free management (Kurgan and Wells 387). Therefore, this paper aims at obtaining a deep analysis on the role of central bank in use and implementation of monetary policy to stabilize the economy. This will be with respect to the great depression of 1929 to early 1940s. Monetary policy is the mean through which the monetary tools of a country control the flow of money. It mostly focuses on the rate of interest with an aim of promoting economic growth and stability. It is key role is to sustain, stable prices and maintain low levels of unemployment. Monetary policy can either be expansionary of contractionary. Expansionary policies increase the supply of money in the economy while the co ntractionary measurers reduce the total money supply to the economy (Bofinger, Reischle and Schachter 123). Expansionary policy is theoretically used to control unemployment in a recession by lowering interest rates in the view that easy credit will motivate businesses into expanding. Contractionary policy is intended to slow inflation in a view of curbing the resulting deterioration and distortions of asset values. The Monetary policies advocated by the central bank helps in fostering the growth of financial market by encouraging open market operations. It is the most used tool by the central bank of each country to correct any economic disorder or to set the pace of a country economic growth (Bofinger, Reischle and Schachter 170). Economic depression is an economic slowdown where the gross domestic product is expected to decline at around 10%. To give rise to greet economic depression, the gross domestic product was believed to have declined by at least 33% per annum. This is the worst in history so far. Economic depression is characterized by; reduced consumption by individuals and the government, increased liquidation of the banking system or narrowing of financial market to the extent that it cannot allocate capital inflow to various sectors of the economy, high levels of unemployment expressed in two digits, insolvency of economic driving companies, a reduction in the wage rate for example, during the great economic depression it reduced sixty percent and acute shortage of money supply in the economy. Thus, depression can be defined as a recession that lasts longer and has a massive decline in business activity thus a slowdown in economic growth (Bofinger, Reischle and Schachter 213). Central bank and monetary policy with respect to the great depression of 1929 to early 1940s can be analyzed from different views. The great depression lasted for 10 years. This occurred when the shares traded in a day tripled followed by a drastic fall in price by about 24 %. The great economic depression was characterized by an increased rate in unemployment which increased by 22% of the total country workforce. The total gross domestic product reduced by half as the price fell by 10%. The depression also caused farmers to lose their farms, and this made them together with the unemployed to move to urban areas in search of daily earnings, this lead to development of shanties thus creation more problems. There were massive bank failures and

Financial Markets Assignment Essay Example | Topics and Well Written Essays - 2000 words

Financial Markets Assignment - Essay Example He classified it into three levels based on the definition of available information: weak, semi-strong and strong forms. He further suggested three models for testing market efficiency: the Fair Game model, the Submartingale model, and the Random Walk model. The weak form of EMH attracted all the attention of empirical research in both developed and emerging markets results. This is because if evidence fails to support the weak-from of EMH, stricter forms of EMH would consequently fail (Wong and Kwong, 1984). The weak form of EMH considers a market to be efficient if information contained in past prices is already reflected in current market prices. Information from historical prices would not enable market traders to make superior returns as this information is already accounted for in current prices. The semi-strong form of EMH considers a market to be efficient only if current market prices reflect all publicly available information, such as information on interest rates, dividends announcements, quarter and annual earnings, etc. Thus market traders would not make superior returns from analysis of market information because market prices will immediately adjust to new news. If all market information is immediately reflected in market prices, even private information (inside information) and market participants could not benefit from such knowledge, the market is referred to as strong form of EMH. This assumes that the cost of inside information is zero. This assumption does not exist in reality and thus the strong form of EMH is not likely to hold. Statistical Testing of EMH: The efficient market hypothesis was tested by a number o f statistical test such as autocorrelation, runs test and variance ratio tests. Data: The data used to test for weak form EMH was collected from Yahoo Finance (2008). Historical daily prices for British Petroleum from the British Stock Market were collected 1st of January 2003 to 3rd of November, 2008. This data contains opening price, daily high, daily low, closing price, daily traded volume, and an adjusted close price. Data representing the market is represented by the FTSE 100 British index. FTSE 100 is an index of the largest 100 firms in the UK based on market capitalization. Historical daily prices for FTSE 100 were collected from 1st of January 2003 to 3rd of November, 2008 from yahoo (2008). Daily return is computed by using the following equation: Return (rt) = closing price at any day (pt) - closing price at day before (pt-1) A natural logarithmic transformation is performed on all data of BP and FTSE 100. Daily returns are computed by using the following equation: Return (rt) = closing price at any day (pt) - closing price at day before (pt-1) To generate a time series of continuously compounded returns, daily returns are computed as follows: rt = log (pt) - log (pt-1) = log (pt/pt-1) Where return at some day: rt Closing Price at day (t): pt Closing price at day