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Credit Crunch - Assignment Example

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Introduction The onset of the Great Recession of 2008 marked a turning point in the economic paradigm that many countries across the world were following till then. Since the crisis was global in nature spreading rapidly across the world due to the interconnected nature of the global economy, responses to the crisis from individual countries varied according to their unique economic conditions that were prevalent in those countries…
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Credit Crunch
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Download file to see previous pages The focus throughout this paper would be on assessing the response of Russia and India to combat the fallout of the global financial crisis as well as examining where they differed and why they differed. The emphasis of this paper is on seeking the underlying theory behind the responses from a macroeconomic perspective. It has been said that the rules of the game have changed after the onset of the global financial crisis and many have even said that it is the end of the world as we know it. This paper tries to understand the responses of Russia and India to the crisis from the unique perspective of the policy makers as presented in the sources that have been consulted for this paper. Russia’s Response to the GFC When examining Russia’s response to the global financial crisis, it would be pertinent to note that above all, the Russian economy is heavily dependent on exports of oil and this forms a significant percentage of the GDP for Russia. Since the Russian economy also has a dual financial system, which consisted of one part serving the households and the other part serving the corporates and foreign markets, the Russian response were a twofold and two pronged calibrated one. This two pronged approach is explained further in the succeeding paragraphs. It needs to be mentioned that Russia was relatively “prepared” for the global financial crisis and hence it’s response to the crisis must be seen in this context (Sestanovich, 2008). On one hand, Russia opted for step-wise devaluation of its currency so as to bolster the real effective exchange rate. As mentioned above, since the Russian economy was heavily dependent on exports of oil, the exchange rate at which oil was exported had to be “adjusted” to take into account the fall in exports. Hence, the Rouble was devalued in a phased manner to make the necessary revaluation of the exchange rate so that the real rate at which oil was exported would be competitive to Russian exporters of oil. The merits of a gradual depreciation of the Rouble as opposed to a one-off devaluation can be argued from the theoretical perspective of a steep fall in the value of a Rouble to a calibrated fall thus giving economic agents ample time to adjust their assets (Sutela, 2010). The second part of Russia’s response was to release the contingency fund or the reserve fund to support the financial system that was reeling under the impact of outflow of funds and which was dependent on foreign markets for business. The point to note here is that the debt held by these banks was mainly short term in nature; the reserve fund was never intended for longer term stabilization and was mainly geared towards softening the fall in fiscal revenue for the banks and the financial system. Further, the central bank could do little by way of monetary policy and it fell to the fiscal policy to support the financial system (Sutela, 2010). India’s Response to the GFC The Indian response to the Global Financial crisis was to provide stimulus and support to the economy by enacting three stimulus packages, one in December 2008 and two more in Jan and Feb of 2009. “The stimulus packages were also designed to rebuild confidence in the economy by: easing the ...Download file to see next pagesRead More
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