Financial structure and macroeconomic stability Research Paper

Financial structure and macroeconomic stability - Research Paper Example However the ability of the policy makers and financial regulators to implement different rules depends upon the control they have upon reducing inflation and output volatility. The transmission of interest rate fluctuations to output levels and prices depends upon a country’s policies regarding banking and management of financial markets. For most policy makers, in majority of the nations, controlling the interest rates in the short run is considered to be most important. Policy development and interest rate changes are however effective only when they lead to an increase the level finance available to firms and individuals who are willing to invest in projects or shift consumption. In many nations it is observed that the banking system is guarded from the impact caused by monetary policies through barriers which are created by the government (Iakova & Wagner, 2001). Monetary policy which gets transmitted to the real economy and thereby impacts the lending policies of the bank requires to be altered as they hinder growth. When the government sheds the assets of the bank, they indirectly create scope for the central banks to bring about stability in output and inflation rates. Therefore establishing a control over the assets possessed by the bank is a suitable way by which it is possible to manage the macro-economic environment. The deposit insurance system is also identified as a crucial factor in the financial regulatory system which affects the economy. The absence or the presence of a deposit regulatory system affects the readiness of bank managers to undertake risks. Subsequently the access available to firms to raise finance through equity and bonds may also get affected. Financial regulators are frequently seen to use bank loans as a tool to implement monetary policies. Therefore if firms are more dependent upon banks, then the efficient implementation of