Financial Intermediation and Instability Studies

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Review of Financial Articles

This paper is a presentation of a review of articles that talk about financial theories. The first article is titled Theory and Policy in response to leaden age financial instability: Comment on Felix written by Pollin (1997). The second article is named Measuring the Impact of financial intermediation: Linking contract theory to econometric policy evaluation by Townsend and Urzua (2009). The articles have given concrete information concerning the financial evolution from ancient to modern society, where the transformation of the economy has been evident but with key challenges and metrics that one needs to understand. Through the articles, a reader understands the link between finance and globalization and the key features that have played roles in changing global economy phenomena.

The Purpose of the Articles

The two papers were written in a financial tone and presented in academic prose. Pollins article is written to enlighten the reader about the financial constraints that have seen society hurt the economy. For example, in his paper, there is mention of high rates of unemployment, poor standards of living among many people, and financial insecurity. The purpose expands further to explain to the reader the difference that has been noticed between the Golden and Leaden Ages in terms of financial perspectives. The author intends to analyze a previous article by David Felix on the growth and development of financial systems (Pollin, 1997). He proposes to establish the grounds for financial issues from the currency crises and regulatory policies that have been applied in various parts of the world, such as Mexico, the US, and the UK. The audience learns a raft of issues regarding the theories that led to financial instability, such as short-term liquidity crisis, lack of stable exchange rates, and loans and security grants that did not settle the magnitude of the crisis.

The other article by Townsend and Urzua is about financial intermediation and how it relates to productivity by factoring credit challenges into occupational choice and risks. The authors have applied static and dynamic structure and ordinary least squares (OLS) in the paper to make readers understand the magnitude of these factors when measuring the impact. Additionally, the article seeks to link contract theory to econometrics. Throughout the paper, the two authors have the intention to show that there is a possibility of alternative models that can assist in searching for instruments that can leverage financial intermediation (Townsend & Urzua, 2009). The article elaborates on the causal effect of interest when it comes to occupation choice and intermediation by linking state variables and multiperiod contracts that affect monetary resources and cash flow in the given countries.

Major Findings

The two works have major findings that can help an individual to understand the issues behind financial perspectives that have changed the world. Regarding the first article, Pollin (1997) discovers that the major findings, as seen in Rollins paper, cover leaden-age speculative finance as the cause for low growth. Through asset trading, there have been excessive resources that have been absorbed, which leads to short-term bias in the priorities for investment. In the case of Mexicos 1995 financial crisis, debt-led growth was the key challenge that led to uncertainties in the economy (Pollin, 1997). The other major finding involves the burden of policy design which in this case is heterodox. Their financial markets have changed due to a lack of extensive government regulation since there seem to be low activities that are undertaken to control domestic and international currency markets. The capital controls and adjustable rates of exchange created room for the floating of the economy hence causing weakness in financial systems (Pollin, 1997). The Keynesian approach appears to be the key theory here as it gives a government a guideline on how stability can be attained.

In the other article, the authors have discovered key findings that would help the audience understand how financial intermediation affects the financial system. One of the major findings is that intermediaries offer a risk-return combination for the investment of capital, hence limiting those which may not require a link leading to augmentation of the economys productivity. Therefore, according to the authors, intermediation pools capital and spreads risk, hindering productivity in a given economy. By use of the Lloyd-Ellis and Bernhardt occupational choice model, there is a possibility that financial infrastructure creates growth per capita. Other aspects that are evident include quality and quantity in welfare gains as well as cash flow inequality (Townsend & Urzua, 2009). By use of an empirical approach, the effect of occupational choice can be leveraged, particularly on whether it brings profits or losses. Therefore, their article shows that intermediation is a concept determined by a countrys economic policy.

Directions for Further Research

While reading the article, the reader is probed to read further to understand the concepts articulated by the authors. In the first article, Pollin (1997) gives a glimpse into the Mexican Tequila crisis. Through that aspect, there is a need to research the effect of currency depreciation on a countrys reserve and its connection to the growing economy of many yet-to-industrialized economies. There is a need to research more on that because the author has introduced the perspective of foreign capital. Still, it remains unclear how emerging markets might be prevented from falling prey to financial instabilities (Eslamloueyan & Fatemifar, 2021). By reading Pollins work, one is equipped with the knowledge of the overvaluation of a given currency. Still, there is a need to dig more to justify how a country may be vulnerable due to dollar-dominated markets (Pollin, 1997). For example, research on the fluctuation of the dollar in a given market and the impacts it may have on the production of fast-moving consumable goods may help. That means a business or country will understand how to leverage the market niche before investing or expecting high returns.

The second article has rich content about measuring financial intermediation and econometric levels. There is a need to continue with research on financial parameters that lead to paralyzed productivity by focusing on macro and microeconomic determinants. If that research is conducted, it will be clear how a country having a high-level real income may suffer from the exchange rate and interest rates, as learned from Townsend and Urzua (2009). Additionally, while reading the paper, the authors have analyzed how financial intermediation is affected by the transition of economies. However, little is covered about the short- and long-term effects of financial control variables. The is a need to offer research on the same so that a person can justify the impediment of inflation toward economic growth (Yakubu et al., 2021). Financial matters are handled keenly so that there is an empirical relationship that can show the correlation between what exists and that which does not.

Valuation of Strengths and Weaknesses

Strengths

Pollins paper has rich content concerning the transition from the Golden to Leaden Age. By reading the article, a person will be introduced to aspects of transformation that have been determining the financial market until today. Pollin combines Felixs work to help the reader understand what a currency crisis means to a countrys economy (Pollin, 1997). Through that exploration, a person can relate to the current monetary issues faced by the governments due to impunity and lack of policy controls, as many officials are embezzlers of state funds (Yakubu et al., 2021). The author has articulated his points well since there is a call to assign financial stability to public policy through legal means. Additionally, the article is well-formatted since the content is presented in professional prose and with the correct attribution of work to various authors.

In the other article, the authors have perfected a glimpse of what affairs are undertaken regarding the intermediation of monetary resources and economic growth inhibitors. The article shows a need to have controlled business intermediation that requires foreign policies and exchange and interest rates (Townsend & Urzua, 2009). The article is written in an academic format and shows linear contexts in the paper.

Weaknesses

While reading the first article, there is challenging to relate the major findings to current economic issues. The article was written in the late 1990s, and the author did not include room for uncertainties of time. For example, he talks about the causal effect of interest, which is linked to the optimization of multi-period contracts. Today that may not be possible since the world has grown to be digitally powered real, which has led to the implementation of matters in a short-term range. Additionally, the article is more aligned with econometrics, focusing on industrialized economies while sidelining the low-economy states. The other article lacks the recognition of the risk management role, more so from foreign market perspectives. There seem to be market imperfections that stem from the asymmetry of information that the authors have used.

References

Eslamloueyan, K., & Fatemifar, N. (2021). Does deeper financial integration lead to macroeconomic and financial instability in Asia? Economic Analysis and Policy, 70(8), 437-451.

Pollin, R. (1997). Theory and policy in response to leaden age financial instability: Comment on Felix. Journal of Post Keynesian Economics, 20(2), 223-233.

Townsend, R., & Urzua, S. (2009). Measuring the impact of financial intermediation: Linking contract theory to econometric policy evaluation. Macroeconomic Dynamics, 13(S2), 268-316.

Yakubu, I., Abokor, A., & Balay, I. (2021). Re-examining the impact of financial intermediation on economic growth: evidence from Turkey. Journal of Economics and Development, 23(2), 116-127.

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