Governments manage the financial condition of their countries through economic policies. The effects of policy change on financial markets are among the primary concerns of economic activists and theorists. Central banks, as the main institutions making these decisions, have a close relationship with financial markets and play a particularly significant role in increasing or decreasing inflation. Generally, it is the difference in these financial policies that reflects the economic status of societies.
What Does Policy Change Mean for Financial Markets?
To answer this question, one must first be fully acquainted with the concept of economic policies. These policies are formed by governments based on studies and analysis of financial data, with the help of influential actors in the economy and consultations with theorists.
What Is Economic Policy?
Economic policies refer to a set of actions and behaviors that governments employ to control and regulate factors affecting the economy and financial status. This important task is accomplished by setting and announcing guidelines. These significant economic factors and elements include the annual budget, supply of money to financial markets, setting interest or profit rates, determining tax rates, government expenses, and other impactful matters.
Financial policies determined by the central bank manage economic fluctuations and pursue ways to achieve market price stability. If this goal is achieved, it means they have succeeded in maintaining inflation at a low and stable level. With this general explanation, the impact of policy change on financial markets becomes somewhat clear.
The types of programs and policies that governments implement to manage their economy are generally classified into three categories:
Fiscal Policies
These programs relate to matters such as setting tax rates, reviewing and managing government expenses and expenditures, and regulating and addressing the country’s general budget deficit.
Monetary Policies
These policies include programs and directives for setting and managing interest rates and profits of banks, and actions aimed at managing and alleviating inflation in the country.
Trade Policies
The third section of economic policy-making by governments is allocated to organizing and regulating commercial matters, including setting various tariffs, handling and defining trade agreements, and related issues.
Goals and Policy Change on Financial Markets
Economic policies are defined and adopted with specific goals in mind, which can be largely guessed from their definition. However, it can be said that the goals and purposes of financial policies are defined as follows, and policy change on financial markets occurs in these ways:
- Managing economic issues
- Controlling economic fluctuations
- Achieving price stability
- Creating balance in economic activities and affairs
- Promoting sustainable growth in countries
- Distributing incomes and expanding public wealth
- Reducing taxes to manage consumer costs
- Developing infrastructure to increase GDP
- Setting and implementing policies for approving minimum wages to reduce income inequality
Why Is Policy Change Important for Financial Markets?
The importance of economic policies on society and financial markets cannot be easily overlooked, as these policies determine the economic direction of the country, marking the path for its growth and development. Another role these policies play is ensuring public welfare and eliminating poverty, which are very directly related. Governments that adopt logical and strong economic policies provide a decent living situation and higher welfare for their citizens.
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With this introduction, the importance of this topic and policy change on financial markets can be categorized and explained under the following general headings:
Maintaining Economic Stability of the Country
The importance of fiscal policies is such that they are tasked with maintaining economic stability, controlling inflation, managing and organizing unemployment in the country, and overseeing commercial flows to achieve this important goal.
Promotion and Economic Growth
Another factor that highlights the role of fiscal policies is the impact they have on achieving economic growth rates, primarily through defining incentives for investors, supporting inventors, and expanding production capacities.
Eliminating Inequalities and Economic and Welfare Injustices
Another factor that adds to the importance of a country’s economic policies is the role they play in aiming to increase citizens’ income levels and public wealth distribution programs. These programs, by mandating taxes on citizens and providing welfare and social services, strive to reduce injustice and eliminate economic inequalities.
How Does Policy Change Affect Financial Markets?
Economic policies are determinant factors in the activities and welfare status of a country; therefore, if their direction leads to economic problems and crises, the outcome will clearly manifest in financial markets. In the following, we will try to explore different aspects of this topic more thoroughly.
Economic Recession
When countries face recession and lack of dynamism in their financial markets, such as the conditions imposed during the Corona era, they try to revitalize the markets by adopting certain policies; for this purpose, they implemented financial stimuli.
Interest Rates
One of the economic responsibilities of governments is managing and setting the interest or profit rates of banks. The more prudently and appropriately these rates are set in accordance with the country’s prevailing issues, the greater the hope for investment; thus, government actions and programs enforce policy change on financial markets.
Exchange Rates
Governments always decide on exchange rates because there is a close relationship between development and public welfare and this rate. The development of trade programs in financial markets is completely influenced by these policymaking efforts.
Government Economic Incentives and Supports
Providing programs and economic actions in support of innovators, inventors, and economic activists is directly related to the development and general growth of countries.
Of course, the impacts that government policies have on the economies of societies have more aspects and dimensions, some of the most important of which we explained.
Conclusion
Governments, as powerful and significant decision-makers regarding countries’ economic issues, consider programs and actions for growth and maintaining stability, referred to as economic policies. With this in mind, policy change on financial markets becomes significantly important and reflects the overall economic situation of the country.
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By David Taha