Behavioural Finance final Essay Example | Topics and Well Written Essays - 1250 words

Behavioural Finance final - Essay Example Different ways of reforms of financial crisis have been developed. Therefore, role of public policy will be discussed through some relevant economic theories developed by the eminent economists. These are Modern Momentary Theory, Moslers’s Law and Reverse Recardian Equivalence. These theories will be applied to identify the best possible ways in light of public sector to address financial crisis. Recommendations from these theories will be analysed in the light of endogenous money theory. Relation of economic crisis with public sector Economic crisis is worst case scenario of an economy which has subsequent effect on the world economy. Worldwide globalization has linked up the economies of all the countries with open economy. Different financial activities of people across the world have substantial or major contribution in economic crisis. Financial institutions especially banks are the major participants in economic crisis which represents financial stability of an economy t hrough the participation of public in various financial instruments. There are many different types of root causes behind the recessions or financial crisis took place mainly in the developed countries in USA and United Kingdom and spread in the world economy. ... General tendency of people is to invest their savings into some sectors that shows future potential and growth to provide more than expected return and i.e. much higher government bond return. But, future growth of a private sector in terms of growth in revenue is depends on the increase in income level as well purchasing power of public in the economy. Therefore, if both are not in a equilibrium position in future, a dramatic bubble occurs in the expected potential sectors and major decline in revenue starts which affect both the equity return as well businesses not able to pay the major creditors like banks (Callan, Nolan & Walsh, 2010, p.15). Effective theories of public policy There are numbers of economic theories developed by the eminent economists who have provided recommendation through their theories. These recommendations are highly related with the financial activities of public sector to address economic crisis. Following three economic theories are most relevant with the ways of reforming financial crisis. Modern Monetary Theory It is a descriptive economic theory that deals with consequences and procedures of using monetary tokens issued by government and it is acts as a unit of money i.e. fiat money. This theory can be applied to analyse modern economies where it acts as national currency of an economy which is issued and regulated by the government. According to this theory of economics, money enters into the market for circulation through the government spending. Taxation is employed in the economy to value the fiat money as currency. It controls the demand and supply of money in the market. Modern Monetary theory maintains a standard equilibrium level of