European–American Trade and Financial Alliances

European–American Trade and Financial Alliances

New Horizons in International Business series

Edited by Gavin Boyd, Alan M. Rugman and Pier Carlo Padoan

In this, his final book, Gavin Boyd has brought together a distinguished group of experts on the nature and extent of transatlantic policy coordination and its implication for corporate strategy. This remarkably relevant set of papers offers a discussion on the economic and financial linkage between Europe and North America, as well as the trade and investment rules governing this interaction.

Chapter 9: The development and structure of financial markets in the European-American economy

George G. Kaufman

Subjects: business and management, international business

Extract

9. The development and structure of financial markets in the European– American economy George G. Kaufman* 1. INTRODUCTION Empirical evidence clearly demonstrates that financial institutions and markets that maximize the flow of funds from savers (lenders) to investors (borrowers), allocate the funds efficiently and permit diversification of risk for lenders both within countries and across countries are a prerequisite for lasting real macroeconomic development and growth. (For a recent summary of the evidence, see Levine, 1997; Wachtel, 2003.) In addition the evidence also demonstrates that the performance of the financial sector importantly affects the performance of the macro economy both domestically and across national boundaries. Moreover breakdowns in banking and financial markets feed back to cause or intensify breakdowns in macroeconomic activity (Bank for International Settlements, 2002). As a result, the current financial public policy focus of many countries and official international organization centres on improving financial sector efficiency by reforming financial regulations and reducing extant barriers that restrict freedom of entry and operation, including pricing, in financial markets both within and across countries. At the same time, recent and continuing rapid advances in computer and telecommunication technology have greatly increased the volume of domestic as well as cross-border (transnational) capital flows by both reducing the operational cost and increasing the speed of transmitting funds across great distances, including across national boundaries. It is now as cheap and as fast to transfer funds from Chicago to London, Frankfurt, Tokyo or Singapore as it is to transfer...

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