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Argentina Crisis in 1982 and Economic Concepts
Argentina was affected by a financial crisis that originated in early 1980’s. The country of Argentina reached a pint where its foreign financial debt surpassed its earning power that the country was not capable of repaying it. This crisis emanated from the fact that the country had borrowed heavily from foreign creditors particularly for the purposes of industrialization most particularly to work on the country’s infrastructural programs. Argentina had a booming economy during the time of borrowing that advantaged the country to getting those loans. In this regard the international creditors were happy to lend the money to Argentina up to 1983. Argentina’s international debt rose to soaring balance of $315 billion from a former balance of $75 billion. This was due to a cumulative annual interest that was increasingly adding up to an annual rate of 20.4 percent. The understanding of terms and economic concepts will put the understanding of the Argentina crisis into perspective.
Trading of currencies is primarily conducted at a international decentralized foreign exchange marketplace. This encompasses all aspects of selling, buying and exchanging currencies at determined and current prices. Foreign exchange market is the largest trading market in the entire world. The main contributors in this sort of trading market are the larger global banks. Financial centers and institutions around the entire world acts as the anchors of trading flanked a variety of ranges of manifold of sellers and buyers around the clock but with an exception of weekends. The foreign global markets are the determinants of the relative values of all the currencies in the world.
The global foreign markets functions through all financial institutions and is operated through many different types of levels. Behind the scenes banks go round to a smaller number of institutions of finance that are generally referred to as dealers. These dealers are actively concerned in huge quantities of trading in foreign exchange. It is important to note that most of these foreign exchange dealers are banks. And in this regard these dealing markets are sometimes referred to as interbank markets. In addition to these dealers some other financial institutions including some insurance companies also do actively participate. The foreign trading involves a huge market of traders with a millions of dollars that are traded on a daily basis. However international foreign markets have modest supervisory entity regulations because of its sovereignty issues.
Behavioral economics and all the related fields has impacts on the social, psychological emotional, cognitive factors on the economic pronouncements. These economic decisions belong to institutions and individual and their consequence in market prices, resource allocations and the returns. This field of study involves with the boundaries of rationality of all economic agents. The behavioral models usually incorporate insights from neuroscience, psychology and micro-economic theories. In this regard it is plausible to to conclude that behavioral models typically covers a variety of concepts, fields and methods. In addition behavioral economics is usually discussed as an substitute to neo-classical economics. This entails the study of how decisions are made and the methods that force public choice.
The main idea in behavioral finance is giving reasons why markets contribute in making irrational methodical errors. This is contrary to assumptions of balanced market participants and key players. The errors made in this regard have a consequence impacts on prices and returns thus creating markets incompetence. Further behavioral finance seeks to investigate the methodology used by other participants in taking advantage of such errors and the consequence of market inefficiency. It clearly highlights market incompetence such as over or under reactions to information, extreme cases of bubbles, causes of market trends and finally market crash. Such reactions have been credited to limited investors’ attention, over optimism, over confidence, noise trading or mimicry. This study is considered to be behavioral economics and the hypothetical basis of technical analysis.
Asset bubble can be seen when there is a sharp increase in the prices of securities and other assets at a sustained rate. This happens to securities or other assets and the prices typically exceed their valuations. Moreover they are warranted by fundamentals making an abrupt collapse to a point that is normally refereed as the busted bubble. For instance one can easily indicate that the housing prevailing booms in Ireland and Spain were caused by low borrowing. As a result their busting resulted to a strained banking system. Risk management and central banking are closely interconnected. The central banks play a crucial part in in the financial markets through their financial operations.
In averting the implications of the theatrical intensifications on bank’s liquidity the cental bank plays key roles. It is however important to note that central banks have no comparative advantage in regulating the operations of credit risk management. They have conventionally held a low level of tolerance in this regard. This has consequently made them to have limited expertise in the operations regarding credit risk management. In case of a financial crisis the central banks have a direct important impact on the allocation or allotment of public money. Therefore the central banks can help to overcome or allay a liquidity crisis by bringing in additional cash into the financial system. The central bank has important and significant instruments that it can use to manage the financial crisis.
Effective monetary and fiscal can help to manage economic crisis and spur economic growth. Economic growth is an important that helps to maintain a sustainable macroeconomic stability. It is a key factor that when effectively used can competently be used to manage an economic crisis. This is because of the fact that a sustainable growth rate depends on key structural dealings such as effective regulatory reforms such as the fiscal and monetary reforms. These policies can help improve the distributions of wealth, income and assets within the entire country. They may be adjusted to contribute to an economic contraction or expansion. Thus the use of sustainable policies is integral factors of sustaining aggregate demand.