Friday, August 12, 2011
Financial markets tiranny or the cost of efficiency losses?
Do policy makers or politicians have to feel constraint by market reactions to any decision they take?.In other words, do markets performance creates a sort of boundaries on what policy makers should or should not do?.After all, there is legitimate authorities and institutions whom any public decision must be accountable to.-.
We have witnessed these days, the wild fluctuations in stock market world wide due to the unsolved debt problem in key countries, and the current uncertainty concerning policies design and its implementation to cope with it.
Government debt is not a new economic phenomena, but simultaneous high level of government debt at global scale (over 75-80% of GDP), might be a risky scenario for a risk averse global economy following the financial crisis of 2008. Government ability to implement countercyclical economic policies become restricted ,because it can not neither increase spending further when it is needed or reduces taxes. The remaining source of support is the Central Bank .Markets take note of the risk of inflation, and the inability to take action .-
The fact of the matter is that financial market not always match precisely the pace and fundaments of the real economy, because does not consider deeply the underlying process of those data upon which financial market make its decisions, creating room for speculative forces. It all comes to prices and the quality of information prices might reflect. The expectations of falling prices because of lacking of credible information,(more uncertainty) induces massive sell off, and with the expectation of more precise information (less uncertainty) and therefore higher prices, it happens the other way around. In both cases, speculative actions work its way through, because there are different risk preferences.
However, the impact of financial markets goes beyond its fluctuations and volatility: it generates efficiency losses and drop in welfare levels causing damage to the cycle production-investment .Markets have a key role to allocate assets and signaling investment opportunities. Acting as an economic risk filter, It helps to shape expectations as well . Therefore, it is not cost free to dismiss markets reactions, although it is important to keep in mind the adjustment due to speculative bias in its behavior .
Latin America policy makers have made substantial progress in the last twenty year ,considering how to work with markets surveillance .It is not a problem of sovereignty , but a basic references of good economic policies .The result, has been the ability to have a full range of policy instrument at their disposal to cope with the risk of global economy .-