Accounting Information System

Accounting Information System

Executive Summary

This report pertains to the selection of an Accounting Information System for an organization having 50 employees and annual revenues of $10 million. A number of accounting information systems has been discussed in the report, but most of them are suitable for a large sized organization with high geographical expansion and huge number of employees. It is evaluated whether a business is small or large, but it always requires the implementation of an appropriate accounting information system to enhance its productivity and reduce its operating expenses.

As the company is operating in an apparel industry, therefore, the PolyPM ERP software has been recommended for the better operations of the company because it contains a number of industry specific characteristics. This will help the company in effectively designing its strategies and products, which will increase its revenues in the long run.


The paper provides an in-depth understanding of the potential challenges that ABC manufacturing will face due to its high dependence upon manual accounting and other management practices. It is important to notice that even in such a technologically advanced era, where almost all the manual and analogue tasks have been transformed to a digital one, ABC manufacturing is still operating manual systems for managing their accounts and other operational management tasks.

The paper is aimed to provide an appropriate suggestion for the selection of a suitable accounting information system that would not only help them in managing their accounts and financial transactions, but will also assist the management in effectively managing other operations of the business.

Company Overview

ABC manufacturing is a small sized family-owned business having its operations in the Melbourne city. The business has 50 employees working at different tasks and locations in the city. It has been established about 20 years ago as a small sized business and their main product line was winter clothes and the main target customers were a number of cloth shops in the city.

It has reported revenue of $10 million during the last year, which is a handsome profit for this size of business. The company has recently expanded its business and launched some new product lines, but due to ineffective cost management of the company, it was unable to offer these products to the customers at competitive prices and faced a downturn in the market in terms of revenues and market share.

One of the major reasons behind its high operating cost is the company’s manual operational and managerial practices because it has to hire a number of personnel for managing different tasks of the company, which can be otherwise cost effectively and efficiently performed by establishing an automatic or computer-based infrastructure for the management of all the major tasks of the company. With the help of such systems, the company would become capable of performing and monitoring multiple tasks simultaneously even in remote areas of the country.

Business Requirements

The current concern of ABC manufacturing is related to the uncontrollable operating cost of the company, which is causing huge losses to the company’s reputation and earnings as well. The major reason behind such a high operating cost is its manual business practices because manual operations don’t only require higher number of employees, but also requires a large office area and other related expenses to accommodate these high numbers of employees.

Therefore, the company needs to employ such an expert information system that will not only address the accounting related requirements of the company, but will also help the management of the company in reducing their operational expenses to increase its efficiency and performance. It will also help the company in transforming its manual sales management and revenues recognition methodologies to a digital one, which will enhance the accuracy and efficiency of the sales function of the organization and increase the overall productivity of the organization (Dickhaut & Lere, 1983).

For the success of a business, it is necessary to have such a competent team of the management, which can make timely and accurate future forecasts regarding the company’s future performance and earnings, such forecasts are usually based upon the company’s past performance and the adjustment of its operations towards the changes of the internal and external economic factors.

It is reported that the company has been planning to expand its business to other markets of the city and even outside the city, therefore, it is necessary for the management to make a competitive feasibility report regarding the company’s expansion of its operations. The feasibility report should be based upon certain realistic estimates and calculations because the company has to take their decision on the basis of that report.

Communication plays a vital role in the development and success of any sort of business because it keeps the employees updated about different departments and functions of the organization. Therefore, it is necessary to integrate an effective communication system into the current organization structure, which will help the company in effectively executing certain activities like job rotation and job enlargement. Inventory management is one of the important processes of an organization that can have a great influence over the future performance of a company.

In order to meet the increasing market demand and retain its customers in the long run, the company has to maintain an effective inventory management system. Which will not only help it in maintaining an effective purchasing function, but also help it in reducing the cost by employing a just in time inventory system. Although, the company has a limited number of employees, but in relation to its size that the management of these employees also becomes a very tough task, therefore, the company needs to have a competent payroll system.

So that it can become capable of keeping the payroll record and disbursement of salaries to the individual bank accounts of all the employees on certain fixed time, i.e., on the 1st day of a starting month or on the last day of an ending month. For a customer centric organization, it is very necessary to meet the changing trends and demands of the market because it would not be capable to stay in competition without addressing the needs and demands of the customers.

Therefore, the management of the company should be capable of evaluating the changing trends of the market and it should be able to timely respond to these changes. This will help the company in capturing the potential customers on a timely basis and give a competitive edge to the rest of the industry.

System Requirements

AIS should be designed in such a manner that it can cover all the business functions of ABC manufacturing, i.e., from managing the accounting transaction system for supporting the top executives of the company in financial planning and decision-making processes. The system should connect all the three major operational departments of the company, i.e., sales, purchasing and production, so that the transactions can be summarized for the internal decision making of the middle line managers.

The AIS should also be equipped with a sophisticated cost accounting system, which will help the management in tracking the total cost associated with the production of a product. This will help the company in proper allocation of its resources and also help it in exploring different opportunities to lower down the production cost. It should also have certain qualities of an expert management system, which means that the system should be capable of organizing data in a logical manner and then forming decision on the basis of this information (Dickhaut & Lere, 1983).

The AIS should be updated according to the applicable financial reporting framework of the entity and should also comply with all the legal requirements of the country where the entity is having operations. It should be capable of exercising strong internal controls over different functions of the organization and connect different departments of the organization with each other through a cloud computing mechanism. It should contain tools like customer relationship management, supply chain management and capable of using advanced accounting techniques, i.e., activity-based costing (ABC system). This will help the company in performing improved managerial reporting by employing a number of analytical techniques.

Software Selection

 There are a number of companies that are offering different software packages to the business community. Some of them sell the software as an end product to the buyer, while the other enter into a service agreement with the companies and offer them different packages, while retaining the ultimate control and ownership of the software with themselves (Fulmer & Gerard, 2015). Intacct is one of the most efficient and productive software that can be employed in a small or midsized business. It is a SaaS (Software-as-a-service) product, which means that it can be accessed at any time by visiting the website of the company through a browser.

It offers a number of products according to the requirement of the entity and support applications for the management of core accounting, project accounting, revenue management, purchasing, order and billing, multi-currency management, financial reporting and also help in the decision-making process (Wu & Cao, 2009). Another software known as Sage ERP is a collection of different products that are designed to meet the requirements of a highly diverse industry, i.e., Sage ERP Accpac, MAS and X3. These products cover a wide range of services and provide a competitive environment for a manufacturing concern. Sage ERP offers functionality for inventory control, supply chain management, manufacturing and distribution, material resource planning and human resource management.

PolyPM provides a complete ERP and PLM solution for small and mid-sized manufacturing and distribution concerns. The software is specifically developed for a company operating in the apparel manufacturing industry. It offers a wide range of industry specific services and possess certain unique characteristic like it can be customized according to the requirements and size of the business. The developer of this software is easily accessible and ready to help the users at any time on their doorsteps. It can be implemented in an organization having annual revenues not exceeding $300 million.

The company is currently operating in a single city with 50 employees and $10 million annual revenues; therefore, a medium sized ERP software is suitable for the company, which would only be able to manage the key operational and management functions of the company. Implementing a medium ERP solution will require lower capital investment as compared to implementing a high-end solution.

It is evaluated that the company is currently operating manual systems and it would require a significant number of resources to train the employees of the company to run a totally computerized system. Therefore, initially the implementation of a medium level ERP will help the company in arranging a suitable training environment for its employees, where they can learn how to carry out computerized based operations. This will reduce the expenses of the company by eliminating the cost required for the training of the employees (Mojzis & Coufal, 1970)

Another reason behind the implementation of a medium level ERP is its user-friendly interface, which will reduce the risk of error and execute different functions of the organization effectively even during the trial period. Unlike the high-end complicated ERP solutions, the medium level ERP system will not require the company to transfer all of its departments to the computerized system simultaneously rather it will provide an opportunity to initially implement the ERP over some of its departments and if the response is favorable, then the company should extend this system over the rest of the organization as well. This will help the company in evaluating the performance of the proposed ERP system and also help it in fixing the weaknesses of the proposed system (Kamiński, 2010).

Accounting Information System Vendor Selection

The Sage ERP and PolyPM ERP solutions are the most suitable options for the company and the company has to make a choice out of these two solutions because the ERP solution offered by the Intacct is not suitable for a business like that of ABC manufacturing. Sage ERP solution is developed by the Sage Company, which is a $2.24 billion business and headquarter of the company is located in England. The company is also operating in other regions of the world under the same brand name (Jutras, 2003). It offers a number of ERP solutions and users have to make their choices according to the specific requirements of their business.

The company also develops software on the demands of the customers and sells it to the buyer as an end product. The Sage ERP X3 is the most suitable product for ABC manufacturing because it is a very cost effective and easy to use product. Users can integrate this software into different processes of their business through a single common system that can be accessed through a single user interface. The software will help the management in timely decision making by dealing different issues of the customers and business in real time scenarios.

It is also capable of addressing the changing business environment and demands of the customers due to the growth of the company enabling the users to improve the productivity of their operations. This software can translate multiple languages for the users and can be used at different locations simultaneously. However, the implementation of this software would require the company to invest heavily at the start, but it will benefit the company in the long run.

PolyPm software is an ERP solution developed by the Polygon Software Company, which has a long history of developing industry specific software for the apparel industry. The company had developed its first software about 30 years ago, known as the PloyNest. However, with the development of technology, most of the businesses have started to transform their operations on the ERP solutions and therefore, the company had also developed a unique ERP solution that is also having the PLM/PDM in addition to the ERP, which are integrated into a single application. The software allows its users to integrate all the functions of the organization from product development to distribution processes.

It helps the management in building an understanding about the specific market requirements and changing trends of the market, so that they can adjust their products accordingly (Chen et al., 2011). Unlike the Sage ERP X3, it can be customized according to the specific requirements of a user’s business and can be installed directly into the client server and run over the SQL database of the Microsoft. This option will reduce the cost of implementation of new ERP software. By incorporating all the steps involved in product development, companies can get a better understanding of the overall lifecycle of a product, from the development of an appropriate and attractive design to the execution of production and distribution activities.

Some of the functions that are incorporated into the software and related to the specific requirements of the apparel business include fabric inspection, size ranges, Cut planning and CMT production. The software also contains some standard production functions to enhance the quality of the products like PSV, order tracking and BOM. It also connects different departments of the company with one another so that they can effectively communicate and share their individual experiences (Bell et al., 2010).

Accounting Information System Recommendation and Conclusion

I would recommend the PolyPM software to the ABC manufacturing company because the company is operating in the apparel industry and this software has been developed according to the specific requirements of the apparel industry. The software contains all the functions and specifications that can easily meet the requirements of ABC manufacturing. It will help the management of the company in managing their operations and product development activities and just like other management expert system, it will also provide suggestions to the management regarding incorporating different sort of changes in its products.

Due to its simple to use interface and low system requirements, it will not require the company to invest heavily in its installation or implementation in the organization (Fulmer & Gerard, 2015). The proposed ERP system will also help the company in managing its inventory, because inventory management is the most important function of an organization and a slight miss management of this function can cause huge losses to the organization, i.e., goodwill, customers and corporate reputation.

The proposed ERP solution will also make a real time connection between different departments of the company and especially between the production, inventory and sales department, this will help them in effectively communicating with each other, which will not only enhance the quality of the product but will also reduce the material wastage (Daneva, 2004).

Accounting Information System ERP
Accounting Information System ERP

A strong communication between different departments of the company will allow its management to implement a just in time inventory management system, which will further reduce its operating cost and the company will become capable of offering its products at competitive prices, based on the successful deployment of an accounting information system ERP.

On the basis of the discussion made in this paper, it has been concluded that Accounting Information System can enhance the productivity and performance of an organization and open a number of new opportunities in terms of new business ventures and growth strategies. The selection of an appropriate Accounting Information System should always be based upon a critical evaluation of the organization’s needs and operations (Hamilton, 2003).

Although, the implementation of such software requires a high initial investment, but in front of the long-term benefits associated with the establishment of such software, these elements are negligible. However, it is observed that a competent software is the one that can incorporate all the legal, ethical and accounting standards and implement them in the operations of the organization.


Bell, R., Dentale, S., Buchner, A. & Mayr, S., 2010. ERP correlates of the irrelevant sound effect. Psychophysiology.

Chen, K., Razi, M. & Rienzo, T., 2011. Intrinsic Factors for Continued ERP Learning: A Precursor to Interdisciplinary ERP Curriculum Design. Decision Sciences Journal of Innovative Education, 9(2), pp.149-46.

Daneva, M., 2004. ERP requirements engineering practice: lessons learned. IEEE Softw., 21(2), pp.26-33.

Dickhaut, J.W. & Lere, J.C., 1983. Comparison of Accounting Systems and Heuristics in Selecting Economic Optima. Journal of Accounting Research, 21(2), p.495.

Fulmer, B.P. & Gerard, G.J., 2015. Selecting an Enterprise Resource Planning System: An Active Learning Simulation. Journal of Emerging Technologies in Accounting, 4(12), pp.150-76.

Hamilton, S., 2003. Maximizing your ERP system. 1st ed. New York: McGraw-Hill.

Jutras, C.M., 2003. ERP optimization. 1st ed. Boca Raton, Fla.: St. Lucie Press.

Kamiński, A., 2010. Computer Integrated Enterprise in the MRP/ERP Software Implementation. Foundations of Management, 2(2).

Mojzis, M. & Coufal, J., 1970. ERP Experimentation Guide Software. Front. 2nd. INCF. Congr. of. Neuro..

Wu, H. & Cao, L., 2009. Community Collaboration for ERP Implementation. IEEE Softw., 26(6), pp.48-55.

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Time Driven Activity Based Costing (TDABC) in Service Industries

Time Driven Activity Based Costing (TDABC) in Service Industries

Time Driven Activity Based Costing – Pierre Omidyar, a computer programmer, formed the eBay incorporation in his own house in California. He designed a prototype of an auction site on his website and named it the Auction Web. From this business, he could charge the sellers for posting their items. A small portion of the auction sale from each sale meaning that the company got revenues from providing buyers and sellers a platform to trade. The business significantly grew and later established a platform where buyers and sellers would rate one another based on reliability and honesty. The company expanded by providing a wide range of products like home appliances, furniture, and electronics cars.

In the next financial year, the owner of the business hired Jeff Skoll being the first employee managing director of eBay. Much of the company’s success can be attributed to Skoll’s skills of designing a business plan which eBay adopted. By the end of 1996, the company had hosted over 250,000 auctions in its website. The following year, the company managed to host approximately two million users. At the start of 1998, Omidyar hired Meg Whitman to act as the Chief Executive Officer and the President of this corporation.

The new CEO brought diversified and experienced personnel from corporations like Disney and Pepsi. eBay was incorporated into the Public by the end of 1998. After this, the share price of the company rose up with three times its value and that how the owner became a billionaire. Due to the company’s success, eBay acquired After this, users were able to purchase and sell their products at lower prices without the use of an auction.

By the end of the fiscal year 2002, eBay managed to acquire PayPal Inc., an online processing company. In the last decade, many companies have relied on eBay to buy or sell their equipment and machinery. The Company has consistently grown over the years which has enabled it to maintain loyal customers. Today, eBay is one of the largest companies dealing with e-commerce business In United States (Bazdan, 2011)

eBay is a service driven company, and hence a cost accounting system applies to this business (Ruhl, & Hartman, 1998). Alternatively, a time driven activity based costing approach used by manufacturing companies may also be utilized by services companies like eBay since it enhanced performance in the business and increases competitiveness. ABC system assists companies in managing their costs whereas TDABC enables cost managers to determine the different cost objects and identify areas that need improvement. Both service and manufacturing companies utilize similar procedures in the ABC system.

These steps include the identification of activities, cost drivers and their related activities. Concerning this, most expenses at eBay are found in research and development. In the financial year 2013, R& D expenses amounted to $1.77 billion. This is surprising since the selling expenses cannot be directly attributed to the transaction and auction services of eBay. However, eBay can use the TDABC system in its services activities.

One of the basic cost drivers of TDABC is time. This is utilized in allocating resources to costs objects. This method is essential since it reduces time wastage and eliminates the complication step that of allocating resource costs to activities and assigning them to cost objects. According to research, the time driven system to ABC defines time as a crucial cost driver because machinery and labor have elements which can be measured by the amount of time used in performing a particular task. Resource capabilities can also be developed by utilizing other metrics like storage capacity in gigabytes.

TDABC method is preferred since it utilizes the cost driver rates based on their ability to hold resources to conduct a particular activity (Kaplan and Anderson, 2004, p. 133). Managers in eBay would utilize this concept in estimating the demand for the resources per unit time needed for every activity like customer contacts and business transactions. Additionally, only two variables are required for each category of the resource; the unit cost used in supplying resource to each department and the consumption of resource by the organization’s activities.

In the first scenario, managers will be required to identify the different categories of resources which perform activities in eBay such as supervision, human resource, outside services, telecommunication department, IT support, legal and support department. For example, we may assume that the total cost in these activities for the Company unit/department which process all the website transaction is $480 million each quarter. The practical capacity will then be estimated for each unit. To develop a practical capacity of 85 percent, for instance, a manager can analyze the capacity in the previous quarter and then identify the percentage of a particular quarter which is 85 percent of a certain period.

Additionally, in this example, it is also assumed that the most significant transactions occurred without any delays such as labor breakdown. The capacity in minutes per quarter is also assumed to be 600 million. To compute the total cost of the resource capacity supplied, the cost analyses would divide the 480 million resource allocation supplied by the 600 million minutes. The cost per minute of supplying the resource capacity will, therefore, be $0.8 per minute; these include all customer services and website transactions.

Lastly, the manager can determine the time needed to perform customer service and website transaction per unit. For example, if the cost analyst determines that the website transaction per cost is 5 minutes per response, and 20 minutes for each customer inquiry, it, therefore, means that there will be a transaction cost of $4 and a customer inquiry of $16. From using the time driven cost information, the company is able to calculate meaningful costs for different activities.

From the analysis, it is evident that eBay can derive some benefits by utilizing the TDABC. Firstly, this approach provides management with a new focus on different costs. This improves the budget preparation which increases the business performance. The management is also able to come up with service mix decisions which enhance cost control in eBay. As a result, the administration can form accurate and appropriate decisions on how they can improve the business processes, pricing and customer services (Kaplan & Anderson, 2007). TDABC enables cost managers to determine cost efficiencies and how capacity can be utilized optimally. It is also the right way of predicting future resource demands.

eBay incorporation has faced recently faced stiff completion both locally and internationally. One of the rival companies includes the Alibaba which denying eBay more revenues. eBay may utilize a time driven ABC system which enables it to gain a competitive advantage over their competitors.

Additionally, the method is able to allocate the indirect costs like support to reflect the resource requirements and how consumes its resources in achieving customer and service activities. Management can monitor the resources by cutting the expenses hence enabling it to be competitive when determining the price structure. The budgeted expenses per unit such as customer inquiries and transaction costs can assist the management to cut down the costs without comprising the quality. Pricing strategies will also be determined based on these costs.

Time Driven Activity Based Costing
Time Driven Activity Based Costing

For services provided online, the management will have more information relating to indirect costs like R&D. The traditional ABC provides less information on direct costs and more labor costs involved. As a result, the cost per unit online services would be less since the business is not affected by physical and geographical factors.

The Company may utilize the low cost per unit in providing more competitive pricing and thereby offer quality online services. TDABC approach enables a company to determine the value of offering an online service and the cost of proving the service via traditional mechanisms. This enables the management to understand the overhead costs by identifying the activities involved in providing these services. This information is important since the management is able to form informed decisions which will increase the customer base.

In conclusion, TDABC use has significantly increased since it provides more and accurate information. This enables costs managers to respond quickly by lowering the costs used in providing the services. TDABC is a dynamic approach meaning that it can be used by both a manufacturing and an online service company. This method, therefore, proves to be more effective than the traditional ABC since it results in better management of costs.


Bazdan, Z. (2011). An International Economy and E-commerce Case Study: eBay. Our Economy (Nase Gospodarstvo), 57(3/4), 44-50

Ruhl, J. M. and B. P. Hartman. (1998). Activity Based Costing in the Service Sector. Advances in Management Accounting (6), 147-161.

Kaplan, R.S. & Anderson, S.R. (2007). Time Driven Activity Based Costing. Boston: Harvard Business School Press.

Kaplan, R.S. & Anderson, S.R. (2004). Time Driven Activity Based Costing. Harvard Business Review, November, 131-138.

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Islamic Banking Versus Conventional Banking

Islamic Banking Versus Conventional Banking Assignment

More than ever before, we live in a global society where an economic disaster in one country can topple the financial security of every other nation. Currently, there are two primary banking systems competing for market share and each claiming that they know best. If we think of Islamic Banking versus Conventional Banking as a sport that results in only one winner, then we are overlooking the benefits that each can offer to global betterment. This paper explores the potential for establishing a global system that creates a stable economic environment using some of the best features of each system.

Over the past two decades, Islamic Banking has increased at a faster rate than Conventional Banking and social banking, its counterpart in Europe “increased 20% per cent per year and doubling their assets between 2007 and 2010”. Benedikter, R (2011). One of the advantages of Islamic banking that is attractive is that it focuses on doing business in a way that creates a method of social responsibility for the greater good by focusing on the individual.

Islamic Banks are not allowed to do business in a way that could put the customer in jeopardy of a harmful outcome. Dubai Islamic Bank, (n.d.) As a result, Conventional Banking systems are beginning to look at their business models in the light of corporate social responsibility while other financial systems are exploring methodologies of conscious capitalism. “… social banking and social finance have become important trends among bank customers in Europe” Benedikter, R (2011)

Yet, in spite increased desire by the public, the concepts of Islamic Banking are still finding it difficult to compete with conventional banking methods both in Islamic nations and in non-Islamic countries. Khan, M. F. and Porzio, M. (January 2010, p 82-83) suggest in their book, ‘Islamic Banking and Finance in the European Union: A Challenge’ that Islamic Banking should be thought of in terms of “ethical performance and substantial destination of the funds rather than as an application of Islamic Law.” This change in the philosophy of how Islamic Banking functions could open doors to the creation of new investments and investors allowing greater opportunity for national economies to compete in meeting the needs of their own societies.

Khan and Porzio are not alone in their assessment for a need to form a collaborative financial system that produces a better outcome for global financial security. Bennett, M.S. and Iqbal, Z. (2013) suggest the development of fixed income products that could attract both socially, responsible and Shariah investors.

Likewise, in Europe and the U.S., there is a demand for more accountability to society –at-large when it comes to decisions banks and financial institutions make. “The younger generation requires that their work and their businesses align with their values, and their values call for sustainable growth that considers people and planet.” Hanlon, P (September 23, 2012) This type of thinking indicates that the concepts of fairness, justice and responsibility are shared by many cultures, religions and philosophies which is a hopeful sign that the old, mainstream banking methods are going to be forced into change.

In Europe and the U.S., another alternative to social banking is constructing banks that are developed according to and adhere to conscious capitalism. According to John Mackey, the social banking lays moral convictions on top of its underlying premise while conscious capitalism places the ideals of a higher purpose and community needs over its profitability. Schwabel, D. (January 15, 2013) As Katie Kerr stated in an interview for Forbes magazine, “…if we can take the power of business to create more positive impact, we can create better communities, create better environments, and become a stronger positive force.” Hanlon, P (September 23, 2012)

One argument that is presented by Conventional Banking promoters is that Islamic Banking is unable to sustain its profits. Yet, there is empirical data showing that the differences between return on assets and return on equity are minimal when examining the two systems side-by-side over the same time frame. Islam, K.M.A. (2014).

Another reason why countries like France and the U.S. from embracing the potential benefits of Islamic Banking is the very words Islamic and Shariah. There exists a deep-rooted assumption that anything connected to either is going to destroy their nation and their belief systems. France came very close to passing an amendment to their tax codes in 2012 which would have allowed the formation of Islamic Banking systems. Then, at the last minute, someone noticed a phrase that pulled the plug “…to conform with the ethical principles of Muslim law or sharia.”Islamic Finance in France, (November 12, 2009)

On the Islamic banking side, problems of controlling the funds in keeping with Shariah law have resulted in the closure of Islamic Banking Windows as a means for Conventional Banks to fill the needs of their customers. The Economist, (February 6, 2012) This small step forward to bringing awareness of an alternative banking method to non-Muslims and of supporting the needs of the local Muslim community to be comfortable with their banking decisions was based on the idea that the banks are a means to purifying finances. While they may have a point for the Muslim world, the decision implies that only a certain group of overseers has the authority to determine what is either “pure” and by extension, demeans all other institutions as evil or bad.

Islamic Banking Versus Conventional Banking
Islamic Banking Versus Conventional Banking

The challenge for setting guidelines for Islamic banking arises when the place it wants to go is vastly different from where it is right now. The Basle Committee for Banking Supervision presented agreed upon guidelines but even if they are all implemented, the Islamic banking system may still not actually reflect the tenets of social justice, which is the primary objective described in every Islamic bank’s mission statement. Hassan, K. and Lewis, M., (2007, p 325-326)

While Islamic banks offer many positive solutions to global stability, both Hassan and Lewis’ assessment Hassan, K. and Lewis, M., (2007, p 325-326) and that of the ‘Concept and Ideology: Issues and problems of Islamic banking”, (n.d.), there is no example that Islamic banks have achieved the goal of 100% reserve funds. This puts into question the actual financial stability using this system.

Social banks have problems of their own when it comes to financial stability. Since each decision is made on a case-by-case basis which means that each bank must remain small and personal, the ability to garner market share sufficient to support a wider customer base is doubtful. Additionally, social banks are either over-specialized or niche organizations that are not powerful enough to make a dent in changing the way that economics are handled on a global scale. Benedikter, R (2011)

Cooperative Banking is an offshoot of social banking that has taken root in Great Britain since the economic crisis of 2008. Cooperative Banking, a popular innovation of shared ownership, has issues that are similar to Conventional Banks, Social Banks and Islamic Banks when it comes to balancing its decision making that holds to the banks mission statements and visions with the need to be profitable enough to support its social efforts.

Mainstream banks focus on maximizing profits. Social banking and Cooperative banking concentrate on the profit-people-planet premise. Benedikter, R (2011) Conscious Capitalism suggests restructuring financial institutions as well as all enterprise systems from the ground up using its own key four pillars to creating a new foundation. Schwabel, D. (January 15, 2013)

In order for both Islamic Banking and Conventional Banking to work hand-in-hand and stop trying to convince the public that they have the only way to a stable economic environment, we need to set aside our pre-existing prejudices, ideologies, assumptions and expectationswhich in itself may be the greatest challenge of all. Islamic banking would need to find more neutral terms that did not stir up the western prejudices against Islam as a whole while Conventional banking would need to redefine what the expectations of banking is.

There is evidence that the population of the world, especially in the U.S. and Europe, is ready to move away from the profiteering seen in traditional definitions of banking and that many people in Muslim countries are willing to consider banking as a contemporary financial system rather than a physical expression of Shariah law. What sounded like a possibility at the beginning of this paper now sounds like a fantasy that may never come to pass. Even with the social awareness of this generation, it would take many years to alter either world view that is firmly engrained in the soul of its followers. Still, I would like to hold out hope that we can take steps toward creating a global view of economics that would result in a more stable financial environment for the majority rather than the minority.


Hassan, Kabir and Lewis, Mervyn, (2007), Northampton, Ma, Handbook of Islamic Banking,

Edward Elgar Publishing, William Pratt House.

Khan, M. Fahim and Porzio, Mario (January 2010), Northampton, Ma, Islamic Banking and Finance in the European Union: A Challenge, Edward Elgar Publishing, William Pratt House.

Benedikter, R., (2011), ‘European Answers to the Financial Crisis: Social Banking and Social Financing’, Spice Digest, Europe Center, Stanford EDU.

Bennett, Michael S., Iqbal, Zamir (2013), ‘How Socially Responsible Investigating Can Help Bridge the Gap between Islamic and Conventional Financial Markets’, World Bank Treasury, Emerald Group Publishing.

Islam, K.M. Anwarul (2014), ‘Examination of Profitability between Islamic Banks and Conventional Banks in Bangladesh: A Comparative Study’. Research in Business and Management, Vol 1, No 1.

The Economist, (February 6, 2012), ‘Conventional Banks have closed their Islamic Windows’,

Hanlon, Patrick, (September 23, 2012), ‘Conscious Capitalism: Can Empathy Change the World?’, Forbes.

Islamic Finance in France, (November 12, 2009), ‘Sharia Calling – A Political Row About Muslim Law.

Schwabel, Dan, (January 15, 2013), ‘John Mackey: Why Companies Should Embrace Conscious Capitalism’, Forbes.

Thorpe, Devin, (May 18, 2013), ‘Why CSR? The Benefits of Corporate Social Responsibility Will Move You to Act’, Forbes.

Concept and Ideology: Issues and Problems of Islamic Banking, (n.d.), web archive article.

Dubai Islamic Bank, (n.d.), ‘What is Islamic Banking’.

Islamic Banking and Conventional Banking Relevant Posts

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Balance of Payment

Balance of Payments and Multinational Corporations


Balance of Payments – Over the last two decades, the world economy has been changed to an extent on which the nations are interconnected with each other in terms of commerce and financial relationship. This circumstance is popularly known as globalization (Vinals, 2004). This interconnection not only helps to exchange goods or service but also force to keep account of financial payment between two countries (Dabrowski, 2006). This record is known as balance of payment. Generally, a multinational corporation has a strong relationship with the balance of payment between two countries (Stein, 1984). The multinational corporation may be affected positively or negatively in the host or home country by the balance of payment (Wilamoski and Tinkler, 1999). The positive relation between MNCs and Balance of Payment creates many opportunities for the multinational corporation. A manager of multinational company must take necessary steps to grab those nice opportunities.

What is Balance of Payment?

Balance of payment is a process of keeping record of transaction of a country with the rest of the word. It includes not only payment for goods and services but also all others payment over the border (Chamberlin, 2009). According the Sloman John, Balance of payment is an account that contains all monetary transaction of a country with the other countries of the world (1998). The transactions contain exports, import, incoming payment and transfer of finance. The balance of payment is usually evaluated based on certain period such as year.  It is also calculated on a single currency, normally US dollar (Mcbride, 2007).

Sources of money are considered positive and deployed of funds is negative items. According to Investopedia, the balance of payment generally should be zero to be optimum (2013). However, it does not happen most of the time. The balance of payment is normally surplus or deficit for maximum country. A surplus balance of payment is said to be exist when the incoming payment is higher than total transfer.  On the other hand, a deficit balance of payment is said to be exist when the transfer payment is higher than the incoming payment.

What is Multinational Corporations or MNCs?

A multinational corporations or MNCs, also known as Multinational enterprise (MNE), is a company that operates is business or produce and sale product in more than one country (Daniels, Radebaugh and Sulivan, 2001). According to Van De Kuil, a multinational corporation follows the internationalized philosophy and operates its business both home and host country (2008).

He also added that to be a multinational corporation, a company must have the assets and facilities outside the border of national country. The host country, home country and the multinational company get benefits from a multinational trade (Kokko, 2006). The host country gets higher tax or vat, the home country get foreign currency and the multinational company get profit. Here is some example of well-known multinational company Honda, Toyota, Google, HSBC, Wal-Mart, Samsung and chevron etc.

Relevance of Balance of Payments to Multinational Corporation

There is a strong relationship between the balance of payment and Multinational Corporation. A multinational corporation helps both host and home country to increase their balance of payment. In the contrary, the balance of payment situation of a country impact the operation of a multinational corporation by changing the rules and regulation based on country specific needs (Ker and Yeates, 2013). Let us look the relevance of balance of payment to Multinational Corporation in terms of different situation.

Relevance Based on “Direct impact”

 A country in which a multinational company is located tends to be get higher balance of payment. It experiences capital inflow when a multinational company get started with a certain fee. It also gets funds or money from the portion of profit of that Multinational Company (Shoo, 2005). On the other hand, the multinational company helps to improve the balance of payment of home country. The home country gets funds when the MNC make profit and return the money to the home country.

Relevance Based on “Regulatory Relation”

Another positive or negative relation between balance of payment and the MNCs is regulatory relationship. The balance of payment represents the foreign reserve of a country. The trade policy of a country changes with the changes on balance of payment position. If a country has negative balance of payment, it tries to hold the money by encouraging more export than import (Hale, 2013). It also tries to get more tax or VAT from the normal sources. This tighten money policy affects the business flow of multinational companies. They have to give more tax to the government. The sales volume of MNCs may rise because the local producer is busy to export in other countries. The MNCs can be the market leader. It may not happen all time.

The rules and regulation may be strict for both domestic and multinational companies. On the other hand, if a country more reserve or balance of payment, it tries to deployed money. It encourages import than import or it invests money to another country as FDI or foreign direct investment. It may reduce the tax burden for MNCs (Bhusnurmath, 2011). By this way, the MNC can get maximum profit. The host country may be benefited from this policy by getting portion of profit when it will get back to it.

Relevance Based on “Measurement Challenge”

The MNC puts a measurement challenge of balance of payment for both home and host country. The goal of a Multinational company is to maximize the profit in after tax all over the world. To do this, they allocate resources, make mixing price system and make extra bill. These conducts is very difficult to measure for the regulatory bodies (Landefeld, Moulton, and Whichard, 2008). There are some good reasons behind this; the resources of production are not same in all countries and the price too. Therefore, it is very tough to evaluate the perfect amount of balance of payment. The mix price is also difficult to detect. Therefore, the proper amount of payment is in question in all countries due the inappropriate recording of MNCs transactions.

Relevance Based on “Foreign Exchange”

The balance of payment is a better indicator of country’s financial status. It helps to evaluate the foreign exchange rate of a country. This exchange rate has direct or indirect effect to the multinational corporation (Wang, 2005). When a currency of a country is strong, the import will cheaper and the export will less competitive. This situation puts pressure to the MNCs to adjust the situation. At that price of goods tends to be cheaper so that the multinational corporation must adjust their price level. Again, when the exchange rate of a country is weaker, the import will expensive and export will high competitive because of inflation. This situation makes higher price level within the country and the MNC have to adjust their price in a high level.

Relevance Based on “Asset Reserve”

The balance of payment also consists of asset such as gold reserve. The higher gold reserve means country has higher trade surplus and thus the higher money supply. This tends to create inflation within the country. Therefore, the MNCs can make higher profit by raising their price level. Conversely, when there is a trade deficit means low assets reserve. This makes the price lower because there is a low money supply. Therefore, the MNCs must adjust their prices level to cope up with host country’s policy.

Relevance Based on “Decision Making”

The balance of payment statistics is very important for all kinds of decision makers. The authority of a country looks carefully the flow of balance of payment. The balance of payment generally is a great indicator of future exchange rate of a country. This put pressure to the monetary authority to take necessary steps to control the money supply. Again, the balance of payment indicates the proper amount of assets reserve for a country. This makes concern for the fiscal authority. They should determine the trade policy, VAT, income taxes and the policy for the multinational corporation. Therefore, we can say, balance of payment accounts are closely related to the overall saving, investment and price policy of a country.

Relevance Based on “Business Policy”

The MNCs are also a good user of balance of payment statistics. They must assess the balance of payment both host and home country for their business policy. The policy of a MNC much depends on the balance of payments flow because change in balance of payment also changes the rules and regulations. When a multinational company try to start their business in another country, they must assess the domestic balance of payment. Because the domestic balance of payment, indicate the permission. If the host country has surplus balance of payment, the MNC can start their operation.

Conversely, if the balance of payment is in deficit position the MNC may not get the foreign investment permission. Again, the MNC must assess the host country’s balance of payment. If the host country has already huge surplus balance of payment, it may not give permission to a new MNC because it tries to invest their money not get money. Conversely, if the balance of payment is in deficit position in the host country, they may welcome new money flow to their country. Thus, the balance of payment position in host and home country affect the decision of business start up. The MNC should also asses the foreign exchange rate position in home and host country.

The weaker currency in home country means the multinational company have to pay more to start their business in another country. Conversely, if the exchange rate is weaker in host country, the Multinational Corporation can start their business cheaply in the host country. Balance of payments also influence the interest rate because of high bank reserve, the MNC also have to consider the interest rate in the host country. The higher the interest rate means the higher business cost for MNC in the host country.

Finance Essays Balance of Payment
Finance Essays

Changes in Balance of Payment and Management Actions

What is change in balance of payment?

Balance of Payments should be equal in all time. However, in reality, it does not happen. The balance of payment is continuously fluctuating all time. This is called disequilibrium of balance of payment. According to TR Jain, disequilibrium payment is a situation when the balance of payment fluctuates from zero (2008). Another author Cherunilam argues that a country’s balance of payment is disequilibrium when there is surplus or benefit (2010). There are three types of changes in balance of payment favourable, unfavourable and balance. Favourable balance of payment means surplus balance of payment. Unfavourable balance of payment means deficit balance of payment. Balance in BOP means equal incoming fund and outgoing funds.

Causes of Changes in Balance of Payments

There are various causes of change in balance of payment. From them, Raj Kumar, author of international economics pointed out three main reasons such as economic, political and natural (2008). He said that if a country is in developing position it must be in deficit balance of payment. The reasons behind economic cause are huge economic development in infrastructure, inflation or deflation, cyclical fluctuation and changes in foreign exchange rates. Again, the reasons behind political cause in balance of payment are political instability and international relations. The natural consequences such as earthquakes, hurricane and others are the reason for natural cause in balance of payment.

Result of Changes in Balance of Payment

The changes in balance of payment may affect positively or negatively to the economy. Here are some Results of changes in Balance of payment:

  • Positive effects of Changes in BOP increase the creditability of a country. Conversely, Negative changes in BOP lower the international creditability.
  • Positive changes decrease the foreign dependency in terms of financial help. Conversely, Deficit changes in BOP increase the foreign economic dependency.
  • Surplus changes increase the foreign exchange reserve. Conversely, Negative changes in BOP deplete the foreign exchange reserve.
  • Reserve of gold is increase in the case of surplus balance of payment. Conversely, the reserve of gold decreases and goes away in negative BOP situation.
  • Negative balance of payment hampers the economic development. Conversely, positive balance of payment improves the economic condition.
  • Surplus balance of payment increases the global market leadership for the home multinational company. Conversely, Deficit balance of payment hampers to get global market leadership position.

Opportunities for MNCs Revealed by Changes in Balance of Payments

The changes in balance of payment position affects positively and negatively for a country’s economy. As the MNCs are one of the important parts of economy, it also gets affected due to changes in balance of payment. Here are some opportunities for MNCs revealed by the changes in balance of Payments.

Business Growth: A multinational company can get business growth advantages in both home and host country. If the home country has surplus balance of payment, the authority approves MNC to start their business internationally. It means they do not mind in capital outflow from the nation as they have surplus funds to invest. On the other hand, a MNC can expand their business to a host country if they have negative balance of payment. They must try to grab money from the other national to increase their business infrastructure. For this reason, MNC is the best way to get finance.

Low start-up cost: A multinational company can start their operation cheaply in host country due to changes in balance of payment. If the host country has deficit balance of payment, they must encourage funds flow from MNC with low regulations and cost. Again, if the home country has high balance of payment, they allow MNC to start its business with lower fees.

Tax benefits: An MNC can also get tax benefits both home and host country due to fluctuation of balance of payment. The home country encourages FDI when it has surplus balance of payment. For this reason, the tax tends to be lower than deficit BOP to encourage foreign direct investment. Again, in the host country the MNC gets lower tax benefit due to deficit balance of payment (Robert, Dunn and Mutti, 2009). The MNC can also get the lower tax benefit, when the country tries to increase their export and reduce import.

Exchange rate benefits: The fluctuation of exchange rate is highly related to balance of payment. This exchange rate or balance of payment affects the operation cost positively or negatively to a multinational corporation. The MNC pay less if the home country has higher balance of payment or strong exchange rate. Here, they get exchange rate benefits due to weak currency in host country. This strong exchange rate also reduces the resources costs in the host country. Moreover, the MNC can get bill paying benefits due to change in balance of payment system.

Low cost of operation: A multinational corporation can experience low cost of operation due changes in balance of payment in both home and host country. It can get factors of production such as land, labour, machinery and others tools at low prices where the balance of payment is lower. Because, lower balance of payment indicates high rate of unemployment in the host country.

Higher Sales: A multinational corporation can increase their sales due to impact the balance of payment in the host countries. When a country experience lower balance of payment, it tries to increase the export and reduce import to get higher balance of payment. To do this, the country should ensure high production unit. The domestic producer may unable to cope up this policy. Therefore, the MNC get the opportunity to sales more during the recovery situation in balance of payment.

Higher Profit: A multinational corporation can make higher profit due to changes in balance of payment. As we discuss earlier MNC can sale higher volume in the host country in the recovery situation. By this, it can make higher profit because higher sales means higher profit (Deresky, 2009). On the other hand, the MNC can make higher profit if the currency of host country is devaluated. For example, European MNC operates its business in US. If the US dollar is weaker than Euro, the European countries will get higher value of money when they convert the money into their own currency.

Measures to exploit opportunities revolved by changes in Balance of Payments

As a MNC operates internationally, it must cope up with the changes on balance of payment in both home and host country. The manager of MNC should be careful to grab every opportunity provided by the BOP. The management measures have been given below:

Seek for growth: A manager of Multinational Corporation should always seek for business growth in home, host or any other country. To seek the business growth opportunity the MNC have to assess the balance of payment position. If the balance of payment is favourable, the manager should grab the opportunity for growth.

Alert all time: The manager should be alert all time to grab the best opportunity for business. As there are various obstacles for a multinational business, the manager have to overcome the obstacle by grabbing the best available opportunity.

Acquire new technology: New technology is very important for a business to get the competitive advantages. A company can implement a new technology to track the balance of payment related data to know the future trend of exchange rate, business cost and tax rate.

Hire business analyst: The manager can hire a business analyst to analyze the balance of payment data and recommend the best opportunity. The analyst also may responsible for making quick and instant decision regarding balance of payment trend.

Implementing short and long-term strategy: The manager can implement a short and long-term strategy for grabbing the opportunity of balance of payment. The short-term strategy may be for less than one year and the long-term strategy may be for above the one year. In addition, this strategy should include the yearly business strategy.


Due to high impact of globalization, every country must engage business internationally through Multinational Corporation. The multinational corporation contribute in the economy of related party’s as well whole world. This report describes that there is a strong relevance of balance of payment to Multinational Corporation. They are related to each other’s in terms of direct impact, regulatory relation, assets measurement, foreign exchange, business policy and decision-making.

This report also describes that the changes in balance of payment creates some opportunities for MNC such as business growth, low start up cost, exchange rate, higher sales and higher profit benefit. Moreover, this report suggests that a manager of a company should take some important measures such as implementing new technology, higher business professional and hiring business analyst to grab the best available opportunity revealed by changes in the balance of payments.


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Deresky, H. 2011. International Management. Boston, Mass.: Pearson.

Eicher, T., Mutti, J., Turnovsky, M. and Dunn, R. 2009. International economics. London: Routledge. n.d.. Negative and positive impact of globalisation

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Landefeld, J., Moulton, B. and Whichard, O. 2008. The Impact of Multi-National  Companies on Balance of Payments  and National Accounts

Mcbride, C. 2007. How to Calculate the Balance of Payments | eHow 2004. United Kingdom Balance of Payments: The Pink Book – Further information on UK balance of payments

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Van De Kuil, A. 2008. Strategies of Multinational corporations in the emerging markets China and India. Mu¨nchen: GRIN Verlag GmbH.

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Balance of Payments Relevant Links

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Asset Price Bubbles

Central Bank Response to Asset Price Bubbles

Recent research in the area of macroeconomics has been focused on trying to identify the causes of the 2007 – 2008 global financial crisis and determining best central bank monetary policies to prevent future crises. A debate that has for the last few decades been settled is now being revived; “lean” versus “clean” handling of asset Price bubbles.

The prevailing consensus of central bank monetary policy has followed the “Greenspan Doctrine” established in the 1970’s for dealing with asset price bubbles. Alan Greenspan, who was the chairman of the U.S. Federal Reserve from 1987 to 2006, believed that cleaning up after an asset bubble burst was less costly and damaging to the economy than allowing central banks to burst bubbles; attempting to “Lean Against The Wind (LATW) (Wadhwani, 2008)” on rising asset bubbles to prevent a bigger burst. This perspective was widely accepted by central banks around the world.

There are mainly four arguments against LATW monetary policy. First, bubbles are difficult to predict; the market would likely detect asset bubbles before regulators would and the market would be able to orderly deflate those bubbles through natural market processes. Secondly, there is evidence that raising interest rates (a central bank strategy for determent) doesn’t reduce the inflation of bubbles since investors are likely to take the risk on high interest rate assets in the midst of an asset bubble based on the expectation of high returns on those assets. Third, the Fed is incapable of isolating dangerous asset bubbles from normal rising asset prices; monetary policy could ham-handedly attempt to prevent asset bubbles but have the effect of harming normal asset prices. Lastly, proactively bursting asset bubbles could make the burst harsher than if the bubble were allowed to burst on its own.

Those cautions have kept the Greenspan Doctrine in place since the late 80’s, but in the aftermath of the 2007 – 2008 crisis, many economists are beginning to wonder if the “lean” strategy may actually be cleaner than the Greenspan Doctrine. Not to mention, the Greenspan Doctrine assumed that bubbles could not be as destructive as the most recent housing bubble. Could central banks develop monetary policy strategies that are more precise in detecting and deterring asset bubbles?

Combating Price Bubbles

Clearly, setting aside the lean versus clean debate, there are standard monetary principles that have not always been followed or enforced. Namely, regulators should demand more transparent disclosure, require more capital and liquidity, apply stricter monitoring of risk, stronger enforcement of compliance, and more accountability for regulators charged with overseeing the financial stability of markets. These policies need to be either reinstated and or reinforced to help stabilize the markets during asset bubbles or otherwise.

But for central banks to devise better strategies for combating bubble driven asset pricing, it is necessary to rethink the Greenspan Doctrine considering how ill-prepared the central banks were for dealing with the crisis in the financial markets. Or, perhaps both strategies have a time and place in setting monetary policy. Frederic Mishkin argues that there is a way to apply the LATW strategy to the financial markets if first central banks understand that there are two different types of bubble driven assets and each one requires a different monetary strategy.

Asset-pricing bubbles are divided into “credit bubbles” – like the housing bubble – and “irrational exuberance bubbles” – like the dot-com bubble (Mishkin, 2011).” He argues that because credit bubbles are so destructive to the economy and so hard to clean up that it would be appropriate for central banks to focus their monetary policies on predicting and deflating credit bubbles before they grow too large. Credit bubbles are linked to the financial markets so intricately that whenever there is a credit bubble like the one just experienced, its bursting usually leaves in its wake a deep recession, a financial crisis and a long period of slow growth and high unemployment.

Asset Price Bubbles
Asset Price Bubbles

Unlike normal recessions, there was no sharp recovery after the last three big asset bubbles. Because it is so hard to recover from credit bubbles, trying to head them off and prevent them is necessary. The LATW can be applied and should factor in to central bank policy because credit bubbles are much easier to identify. Each credit bubble shares certain symptoms that could alert regulators to the problem: lower lending standards, premiums on risk become abnormally low and credit is being extended at a much faster and higher rate (Mishkin, 2011).

The central bank targets these credit bubbles by slowly raising interest rates to discourage excessive risk taking in the credit markets. By inflating the interest rates on these assets, central banks can tamp down exuberance as well as spark growth in a slowing economy (The Financial Times LTD, 2014). This requires central banks to turn their focus more sharply and aggressively towards monitoring and reacting to irregularities in asset pricing more than the traditional singular focus on controlling inflation (Wadhwani, 2008) (Gambacorta & Signoretti, 2013). Lastly, this type of proactive monetary policy could have the effect of reducing moral hazard through proactive responses to booms as opposed to the reactionary approach to booms after the bust; this could discourage the reckless risk taking that typifies credit bubbles (The Financial Times LTD, 2014).

While economists are still debating the merits of the LATW strategy of curtailing asset price bubbles, it is without question that the traditional standards of monetary oversight have been too lax over recent decades and reinforcing those policies will go a long way to restoring healthy checks and balances to the world market. However, it has also become very clear that these boom and bust cycles threaten financial stability in such a way that central banks can no longer ignore fluctuations in credit markets. While focusing on controlling inflation is still a target for central bank monetary policy, central banks must now focus efforts on developing Bubble Policies (Rudebusch, 2005) that can prevent or deflate asset price bubbles before they can do real damage to the economy


Brittan, S., Meltzer, A. H., Wolf, M., Smaghi, L. B., Schlesinger, H., Mayer, M. Frankel, J. (2009, Fall). Should, or Can, Central Banks Target Asset Prices? A Symposium of Views

Gambacorta, L., & Signoretti, F. M. (2013, July). Should monetary policy lean against the wind? – an analysis based on a DSGE model with banking.

Mishkin, F. S. (2011). How Should Central Banks Respond to Asset Price Bubbles? The ‘Lean’ versus ‘Clean’ Debate After the GFC. Reserve Bank of Australia June Bulletin, 59-67.

Rudebusch, G. D. (2005, August 5). Monetary Policy and Asset Price Bubbles.

The Financial Times LTD. (2014, April 16). Definition of leaning against the wind. Retrieved from Financial Times Lexicon:

Wadhwani, S. (2008). Should Monetary Policy Respond to Asset Price Bubbles? Revisiting the Debate. National Institute Economic Review, 25 – 34.

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