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Financial Stability in Open Markets Economy: Holistic Approach in Economic Policy

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  • Marijana Mitrović Mijatović

    ()
    (Director of the Research and Statistics Department, Central bank of Montenegro)

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    Abstract

    Financial stability does not have a precise definition. A stable financial system implies a state of institutional, regulatory and market environment in which accurate information is available and there are effective mechanisms to adequately assess the risk in transactions. In such a business environment, the return corresponds to the undertaken risk and risks are properly identified and addressed. Systemic risk includes all risks in the market, acting alone or in interaction with the associated risks that can jeopardize stability of the system. Macroprudential policy is a policy that is focused on threats that create such systemic risk. An appropriate choice of macroeconomic and prudential policies is oriented towards the creation of a financial system that is able to absorb serious disorders, prevent accumulation of systemic risk and perform basic functions of a safe and sound financial market. In open economies, especially those with the choice of more fixed exchange rate policy framework such as euroisation, monetary policy instruments become less effective and limited. In such policy constellation, financial stability maintainance becomes more important and targets not only the monetary policy but also overall macroeconomic policy stance. The institutional and legal framework aims to create the financial infrastructure that would initiate preventive actions to preserve stability and prevent the development of a crisis as the last phase of instability development.

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    File URL: http://www.cbcg.me/repec/cbk/journl/vol2no2-4.pdf
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    Bibliographic Info

    Article provided by Central bank of Montenegro in its journal Journal of Central banking Theory and Practice.

    Volume (Year): 2 (2013)
    Issue (Month): 2 ()
    Pages: 51-79

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    Handle: RePEc:cbk:journl:v:2:y:2013:i:2:p:51-79

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    Keywords: Financial stability; systemic risk; monetary policy; open economy; euroisation;

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    1. Anna J. Schwartz, 2002. "Asset Price Inflation and Monetary Policy," NBER Working Papers 9321, National Bureau of Economic Research, Inc.
    2. Frederic S. Mishkin, 2011. "Monetary Policy Strategy: Lessons from the Crisis," NBER Working Papers 16755, National Bureau of Economic Research, Inc.
    3. Mishkin, Frederic S., 1999. "Lessons from the Asian crisis," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 709-723, August.
    4. Allen, William A. & Wood, Geoffrey, 2006. "Defining and achieving financial stability," Journal of Financial Stability, Elsevier, vol. 2(2), pages 152-172, June.
    5. Garry J. Schinasi, 2004. "Defining Financial Stability," IMF Working Papers 04/187, International Monetary Fund.
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