Role of Government in Financial Markets

Role of Government in Financial markets

Introduction

Financial market is a place where securities, commodities and other financial instruments are traded among individuals at a low transaction cost. A proper functioning of financial markets is very essential for the development of an economy. It helps businesses in raising capital for expansion and development (Capital markets), provide alternate options to mitigate the risk exposure (Derivative markets), and also help businesses in maintaining the ideal liquidity position (Money markets). Thus, the contribution of financial market in the strengthening of an economy cannot be overlooked. These financial markets are subject to follow certain rules and regulations implemented by the government of the country (Glenn R, 2010). Financial markets play a very critical role for the development of the economy and overall economic development, but it is somehow reliable on the government actions and policy decisions. Roles which government plays in the financial market are of three types

Passive Rules [Regulation]

Active Rules [Intervention]

Arbitrators

It is very essential for governments to understand the effectiveness of these three rules because just like any other industry the financial system of an economy is based on them. A question arises regarding the extent to which a government can intervene in the functioning of financial market. The first primary undertaking of government in the financial market is its role as a regulator. The second primary undertaking of government in the financial market is its role of intervening.

Government Role as a Regulator

The role of government in the functioning of financial markets is an issue of long standing debate among the regulators and financial economists. The success of government intervention in the financial market is not sure, a number of market failure has also occurred due to the involvement of the government. A number of regulatory authorities are working ...