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BFSI Chronicle, 2 Annual Issue, 10 Edition July 2022
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The global financial crisis (GFC) in 2007–2009 Building an Economic Laboratory: A Model
has brought to light the importance of an with Two Sectors
efficient financial sector to the global economy. One weakness of the above empirical
Following a series of recessions witnessed approaches is that the findings do not shed
by emerging markets and the GFC, it has much light on the exact mechanism through
become blatant to practitioners, regulators, which finance affects economic growth. To
and researchers that the financial sector and answer this question, the third and final
macroeconomic variables are interrelated. approach that I discuss here takes a different
Meanwhile, sustained economic growth is the tack. Indeed, it turns the previous approaches
primary focus of every economy on their head. It starts by building an economic
model whereby financial markets do have an
Despite covering many different asset classes impact on the long-run economic growth. The
and having various structures and regulations,
question is not whether finance is a causal
all financial markets work essentially by factor for economic development (which is true
bringing together buyers and sellers in some by assumption) but how big an impact financial
asset or contract and allowing them to trade
development has on economic development
with one another. This is often done through an
auction or price-discovery mechanism. FGI- Financial Development Index; EG-
Economic growth; FIAI- Access to Financial
To facilitate saving by businesses and
Institutions Index; FIDI- Financial Institutions
households: Offering a secure place to Depth Index; FIEI- Financial Institutions
store money and earn interest
Productivity Index; FII- Financial Institutions
To lend to businesses and individuals: Index; FMAI- Financial Markets Access Index;
Financial markets provide an FMDI- Financial Markets Depth Index; FMEI-
intermediary between savers and Financial Markets Productivity Index; FMI-
borrowers Financial Markets Index;
To allocate funds to productive uses: According to world economic forum WEF, the
Financial markets allocate capital to economic development variables are defined as
where the risk-adjusted rate of return is the following:
highest
First, The Competitiveness (COMP) is
To facilitate the final exchange of calculated within the Global Competitiveness
goods and services: such as contactless index (GCI) by including a weighted average
payments systems, foreign exchange, etc. of many different components, each measuring
a different aspect of competitiveness. Second,
To provide forward markets in currencies
the Financial Market Development (FMD)
and commodities: Forward markets measured by capital available for private-
allow agents to insure against price sector investment from the resources saved by
volatility
a nation’s population, as well as those entering
To provide a market for equities: Allowing the economy from abroad as loans from a
businesses to raise fresh equity to fund their sound banking sector, well-regulated securities
capital investment and expansion. exchanges, venture capital, and other financial
The Institute Of Cost Accountants Of India
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