Macroeconomics, Real Economy, Financial Sector: Linkages & Outcomes - Essay Sample

Introduction

The events over the past years provide a salutary reminder about the macroeconomics usefulness of the linkages between the real economy and the financial sector. It has ended up being the commonplace concerning the observation that economy models which stand to have neglected factors of economic and monetary have been wanting. The reality of the matter remains that policymakers, the research community, and practitioners hold to have embarked on the need to enhance their comprehension about such linkages, thereby developing more robust structures when it comes to the aspects of managing systematic risk together with macroeconomic dynamics. The reality is that financial crises tends to share various commonalities (McDowell, 2019).

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Correctly, crises stand connected with the appearance of euphoria along with belief upon which new concepts, including business innovation or advancement of the technology, tend to render the outdated limits about economic performance obsolete. Having commonalities in the financial crisis anatomy results in many hopes. The suggestion remains that it stand possible to come up with warnings of nascent crises at early stage. The implication remains that policymakers have the capacity of designing as well as implementing policies that avoid or contain messes. Yet those hope need not upsurge to complacency, or belief that via tweaking of policy structure, past financial crises stand condemned (Reis, 2017). The fact remains that every financial crisis remains unique, particularly in terms of what triggers it and the aspect of propagating via the financial system along with the specific sectors mostly affected in each given episode. Because of the above, there is a need for putting in place innovative, as well as a flexible crisis management approach. Policymakers must be consistently alert, putting into account that financial turmoil stands likely to come up in a way not expected.

Role of Central Banks on Future Financial Crisis

Central banks can emphasize on the monetary analysis in that way, including regular assessment of the credit development, which stands as the critical aspect of the structure upon which monetary policy decisions stand prepared. Close monitoring about the development of the financial as well as credit development makes up an essential element when it comes to the identification of misalignment of asset price likely to threaten worth along with the stability of macroeconomic. The central banks need to continue activity researching such areas in their determination of ongoing enhancement of monetary analysis. Often the decision of the central banks in paying close attention towards the development of monetary and financial aspects of establishing monetary policy remains controversial (Seccareccia & Khan, 2019). The reality of the matter is that the canonical monetary policy model tends to have neglected the monetary aggregates' role along with their counterparts. Such action tends to have emphasized the output gap as one of the critical gauges of the pressures of inflationary.

The usefulness of credit development, along with monitoring money, remains acknowledged more not only in the world of academic literature but as well to the policy debate. In particular, the leading academics argue in favor of redefining as well as monitoring new monetary indicators in that way, detecting the aspects of constructing leverage in the financial sector. The notion of acknowledging the usefulness of the monetary analysis remains not a panacea. Instead, it is the main starting point of a challenging process that demands ongoing monitoring as well as an understanding of the financial innovation, including the continuous attempts of sharpening as well as deepening comprehension of the economic developments.

It is not advisable to consider monetary analysis as being and end by itself. The facts remain that financial analysis stands only paramount since it enhances policy decisions besides furthering the attainment of the ultimate objective on the central banks. One of the fundamental objectives of the central banks entails maintenance of the price stability in their respective countries (Ehrmann, et al., 2019). Thus, there is a need to adopt a medium-term placement in pursuing such objectives, thereby acknowledging the lags involved in the monetary policy transmission that make "fine-tuning' development of the price when inevitable economic shocks confront an economy.

Taking into consideration the medium-term orientation facilitates a certain level of flexibility to the makers of the monetary policy. The reality of the matter remains that there are various policy interests' paths consistent with the notion of maintaining the stability of the price over the medium term. Which having the option of selecting among multiple tracks, the policymakers have the option of seeking policy settings that have financial imbalances emergence in that way imparting more excellent stability to the whole economy (Ojo, 2016). It is argued that monetary analysis, along with the development of the credit have the potential of offering insights towards the slow financial imbalances accumulation, thereby identifying the growing threat to the stability of general macroeconomic along with confidence in the price in the long term. Because of such prevailing signals, central banks ought to respond promptly and commensurate.

The aspect of responding to the development of the money and credit gives an implication of 'leaning against' misalignments of the asset price and financial imbalances. Although such an approach gives rise to the volatility of some inflation in the short run, the point is that it serves well the stability of price and macroeconomic at the longer horizons. Although carrying out monetary policy assist in providing a conducive environment of the price as well as macroeconomic stability to financial stability, the fact is that alone cannot be enough (Ashworth, 2016). Responsibility of maintaining financial security needs to a great extent fall on the regulators together with supervisors' shoulders. Following this dimension, the crisis had given highlights on the differences between the risk that faces individual financial institutions and the systematic uncertainties.

It is a known fact that risk management stands an indispensable financial intermediation aspect. Banks are expected to reward depositors, thereby continually searching for opportunities for investment, hence offering rates of return higher than funding costs (Cespedes & Chang, 2019). According to financial economics, it is undertaken that increasing risk stands as the only means of earning higher returns. Thus, financial intermediation remains impossible in the absence of taking risks. From that viewpoints, challenges arise in two setups, the first one entail financial intermediaries selecting the combination of risk along with returns not efficient from the perspective of an individual. Such happens whenever players in the commercial sectors have their enticements aligned contrary to prudent practices. Such problems need to be tackled using a suitable framework of micro-supervisory (Ojo, 2016). For an extended period, the main focus of the financial supervision remained on making sure that the financial institutions were sound.

At the micro-level, supervision is not an easy task. It remains complicated by the innovations along with the uncertainties characterizing the historical practice. Also, in the second phase, challenges may develop upon which the choice of the risk along with returns stand appropriate the level of the individual bank. However, different banks a time fails to take into consideration the impact of their decisions regarding the remaining financial system. A case in point is that individual banks tend to be reasonably willing to hold risky tranche regarding mortgage-backed associated with the fee in line with the current rates of the market (Ashworth, 2016). It is worth noting that the whole baking system may nevertheless fail to take into account the full dimensions of the risk connected with the security.

What is more, it may fail to consider the widespread assets holdings subjected to the standard risk whose effects entail creating catastrophic outcomes for the entire system. Whenever the value of the assets starts coming down, it happens that a fire sale stands ignited since every bank tries to take protection from further value reductions, yet no banks remain on the other side of the market. The reality remains that such considerations stand magnified following the context of the innovations as well as uncertainties characterizing the creation of the financial crisis. In such an environment, the individual financial institutions, along with the regulators, tend not to be fully aware of all interconnectivity as well as corrections connected with the new business models and financial instruments.

The systemic risk instability, along with its potential economic costs, has, for a long time, been recognized not only in the policy circles but also in the world of academic literature.

From the above viewpoint, it is apparent that central banks tend to have been generating regular financial reports of financial stability that attempts to identify as well as analyze the above mentioned risks. However, the financial crisis has fueled the need for deepening such analysis, thereby taking suitable policy actions in addressing the involved dangers as well as preventing them from generating more losses on the real economy. Contra to such background set up, central banks ought to come up with extra tools as well as policies recognized under the comprehensive headline of macro-prudential. For example, in Europe, the European Council has established an independent body in control of the macro-prudential oversight named the European Systemic Risk Board (ESRB). The central undertakings of the ESRB entail identifying as well as assessing risk towards the stability of the financial system of the European Union, thereby issuing risk warnings whenever the risk seems significant. In its appropriate times, ESRB has the potential of complementing its risk warnings by use of the policy recommendations regarding remedial action (Cespedes & Chang, 2019). In pursuing this task, ESRB also needs to depend heavily on the commonalties identified via the experience of financial crises. It is such commonalities that give the basis upon which risks stands identified at an early stage upon which remedial policies stands introduced. Via the exploitation of the standard features concerning the lead-up to previous financial crises, it becomes easy for the policy-makers to come up with the nascent financial distress. By way of refining the current policy regime when it comes to prudential and monetary dimensions, policymakers can exploit such information. In that way, minimizing the frequency and the severity of the financial crises hence impacts the price stability and macroeconomic.

Effective Management of the Financial Crisis

Typically, financial crises tend to instigate not only significant but also sudden fall in aggregate demand that owe to the adverse wealth effects, and the collapse of the confidence. Although such shocks tend to be challenging to quantify in real-time, conceptually, they tend to be related to the shocks that monetary policy addresses continuously. In simple terms, price development downward pressure connected with the economic activity fall tends to be countered by the use of standard interests' rate policy, minimizing the rates of the official hence spur spending besides bolstering confidence (Dow, 2019). All of the above measures serve well in maintaining dynamic price stability....