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

Author

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  • Marijana Mitrović Mijatović

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

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.

Suggested Citation

  • Marijana Mitrović Mijatović, 2013. "Financial Stability in Open Markets Economy: Holistic Approach in Economic Policy," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 2(2), pages 51-79.
    • Handle: RePEc:cbk:journl:v:2:y:2013:i:2:p:51-79
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Financial stability; systemic risk; monetary policy; open economy; euroisation;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance

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