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The Research on the Financial Development and Financial Safety of Transition Economies in Russia and Central Eastern European Countries

Author: LiuKun
Tutor: GuoLianCheng
School: Dongbei University of Finance
Course: World economy
Keywords: financial globalization transition economies financial safety capitalflows
CLC: F83
Type: PhD thesis
Year: 2012
Downloads: 263
Quote: 0
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Abstract


Since the1970s, developed countries have adopted the financial liberalization policies, lifting the financial regulation, with the developing countries also gradually opened up their domestic financial markets. Under the so called "Washington Consensus", most of the transition economies have implemented varieties of financial reforms. At the same time, they establish the basic banking regulatory systems, with the introduction of the new banking laws and regulatory laws and the opening of the financial industries, together with the abolition of restrictions on cross-border stock and bond investment, allowing foreign banks to enter the capital markets. Over the past ten years, the transition economies have deepened the financial sectors which are characterized by dependence on foreign capital inflows. International capital inflows supplement the gap between savings and investment, providing necessary funds to meet the demands of consumption and investment.Nevertheless, in transition economies, there arise more and more financial risks. For example, capital inflows gave birth to the asset bubbles of the host countries, which put pressure on the host governments, increasing the difficulties of the financial regulation. It’s worse when the international economic situation changes which will result international capital outflows. With the continuous development of financial globalization, the frequency of financial crisis is becoming higher and higher, wich endangers the financial safety of transition economies.This dissertation takes a comprehensive analysis of the financial development and financial safety issues in context of financial globalization in transition economies. It is structured as follow:Chapter1is an introduction, defining the research background, summarizing up the research status, and stating the basic framework of the research.Chapter2is about the theories of financial globalization, financial development and financial safety. First, various theories of financial globalization is discussed. Secondly, the relationship between financial development and financial globalization is analyzed. Finally, theory of financial safety and the relationships among financial globalization, financial safety, financial crisis and financial supervisions are explored.Chapter3is on the development of the financial industries in transition economies of Russia and central eastern european countries. The history of banking sector development is analyzed, with their reform and opening-up to foreign investors. Then comes the analysis of the development of securities markets, including stock and bond market development and their opening-up to foreign investors. Final of this part explores the characteristics of the financial sector and relationship between the development of financial sectors and economic growth in transition economies.Chapter4explores the relationship between financial intergration and financial safety in transition economes of Russia and central eastern european countries. First part reviewes the capital account liberalization and capital inflows in transition economies. Second part analyzes the relationship between foreign ownership and the banking stability. Russian banking sector is studied as a case for the discussion of the foreign debt leverage and the effectiveness of capital controls. VAR model is applied to analyze the comovement between the Russian stock market and global capital markets.Chapter5is about the macroeconomic management and financial safety in Russia and central eastern european countries. First part explores the macroeconomic stabilities in the context of financial globalization. Second part deals with the role of fiscal and monetary policies in the maintenance of the financial stability. Finally, macroeconomic policies to combat the global financial crisis in2008and thereafter are examined.Chapter6is on the financial regulation in trantition economies of Russia and central eastern european countries. First part deals with the regulation of banking and capital markets and capital controls. Secondly, measures to lift financial industries out of the2008crisis are reviewed. Final part explores the requirements for the reform of the global financial institutions and the cooperation mechanism in regional financial industries.Chapter7summarizes the main conclusions of this study and concludes referencial points from the perspective of China.The main conclusions are as follows:(1) Under financial globalization, financial security of transition economies are affected by both internal and external factors. Capital inflows promote consumption and investment in host countries, but they also cause excessive inflation, leading to current, account deficit, foreign debt accumulation, and macroeconomic instabilities. Under the circumstance of financial globalization, government of transiton economies should implement sound macroeconomic policies, with prudential financial supervision in order to benefit from financial globalization.(2) Macroeconomic stability is indispensable under the context of financial globalization.Government’s role is to limit the negative effects of international capital flows, and gain benefits from it. For example, it should put restrictions on short-term capital inflows to encourage long-term inflows. Fiscal and monetary policies are useful in two aspects:First, is prevention of the outbreak of financial crisis, the second is reduction of the impact of financial crises on domestic economy. To achieve sustainable economic growth, counter-cyclical economic policies should be chosen.(3) Financial development and safety are interrelated. Financial safety is an important prerequisite to the development of financial sectors. It’s known that the development can not be achieved without a good, safe financial environment. Conversely, the outbreak of the financial crisis will cause serious damage to the financial development. On the other hand, financial development does not just mean the expansion of the banking sector and the securities market, it also includes the establishment and improvement of the financial institutions which will facilitate the financial safety of the transition economies. Therefore, financial development and financial safety are inseparable and interconnected.(4) Financial regulatory is essential to financial safety. Cross-border capital flows, especially short-term flows are unstable, so the government must implement prudential supervision on banks, securities markets and undertake capital controls when necessary. For most transition economies over the past decades, the banking lending is growing rapidly which threatens the financial safety and the banking supervisory authorities should take measures to limit it.The main contributions of this paper are as follows:(1) Transition economies’financial safety is not just related to international capital flows, but also internal factors, including macroeconomic policies and financial regulation. Both internal and external factors combined decide the impact of financial globalization for a country’s financial safety.(2) Among the transition economies, the role of the government functions varied. To a certain extent, this kind of variance determines the differences of the financial and economic stabilities in transition economies.

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