The national capital market is viewed as a platform for businesses and people who are seeking to accumulate capital and individuals who are ready to lend capital to a local economy. Capital market like any other commodity is propelled by the forces of demand and supply. A high offer of capital in the market attracts low interest rate paid on the borrowing. Technology has increased the growth of capital market by allowing people to link faster (Cumming & Zahra, 2016).
There are two ways that one can borrow capital, either equity or debt. When borrowed through debt one has to pay the loan with the principle and interest (Gauvin et al 2014).One form of such debts is a bond that is offered the government or the private sector. On the other hand, when borrowed through equity, one gets a partial ownership of the company, and the lender takes part in sharing both the profit and the loss (Cumming & Zahra, 2016). In the two methods, both the shareholders and the bondholders can liquidate their investments an aspect that poses a risk to the borrowers. It is hard to control the capital market on a national scale because of various cultural, government and political influences. In Canada, Export development Canada, EDC offers financial and insurance services so as to lower the risk of unregulated financial markets (Gauvin et al 2014).
Cumming, D. J., & Zahra, S. A. (2016). International Business and Entrepreneurship Implications of Brexit. British Journal of Management, 27(4), 687-692.
Gauvin, L., Gosselin, C., Paquin, S., Dube, A. S., Goudreau, S., Poirier, M. H., ... & Grou, J. (2014). Function and public awareness of sustainable development and population health projects in Montreal, Canada: a logic model and survey of the Quartiers 21 Program. The Lancet, 384, S15.
The monetary policy comprises of government discussions relating to the supply of money through the central bank. For example, monetary policy in Canada is achieved through adjustments to short-term interest rates to increase the money supply and control inflation. As financial capital is mobile in Canada, then the interest rates on similar assets and that make the Bank of Canada the only issue of bank notes. Despite the fact that many variables influence decisions on monetary policy; the Bank of Canada is the sole policy tool. Monetary policy is carried out by Bank of Canada and is mainly accountable to parliament. In Canada, commercial banks make short landings at the interest rates that change daily.
Those countries that are developed are usually viewed as free-market economies where demand and supply dictate the price of assets. Unlike before the 2oo8 financial crisis the central bank only had to adjust the interest rate to control growth and inflation, but now it has to use conventional methods to inject money into the economy (Demirguc-Kunt, 2017). The changes in the fiscal policy that are taxation and public expenditure affect the asset prices on the economy and eventually the households. Besides controlling the money supply in the economy, the central bank is concerned with controlling inflation. Lowering interest rates increases economic activities, and so inflation and increasing the interest rates decreases the level of economic activities and therefore reducing inflation. (Demirguc-Kunt, 2017). Correspondingly, exchange rates influence the degree of financial stability. The central bank of any country assumes the role of adjusting interest rates so as to set the currency exchange rates. Raising interest rates encourages traders to purchase the countrys currency which increases its value compared to other currencies.
Demirguc-Kunt, A., Horvath, B. L., & Huizinga, H. (2017). Foreign banks and international transmission of monetary policy: evidence from the syndicated loan market.
Monetary policy aims to maintain low inflation rates high employment and strong economic growth rate with stable prices and wages (Munck af Rosenschold & Wolf 2017). Central banks use monetary policy to control the supply of money in the economy by selling and buying securities in the open market. When the bank of Canada purchases government bonds, the level of money supply in the economy immediately increases. The expenditure of real GDP is highest at the peak after which it declines through the contraction phase. At trough phase, the central bank lowers interest rates to stimulate foreign investment and therefore raise real GDP. The expansion phase is the recovery period where interest rates are increased while not offsetting foreign investment in the economy. (Munck af Rosenschold & Wolf 2017).
Munck af Rosenschold, J., & Wolf, S. A. (2017). Toward projectified environmental governance?. Environment and Planning A, 49(2), 273-292.
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