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Measures of Financial Stability in Macedonia

Author

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  • Magdalena Petrovska

    () (National Bank of the Republic of Macedonia)

  • Elena Mucheva Mihajlovska

    () (National Bank of the Republic of Macedonia)

Abstract

This paper aims at reviewing the work done towards developing quantitative measures of financial stability in Macedonia. The approach to the development of these measures concerns the macro-prudential dimension of financial stability. Constructing a single indicator to indicate the level of stability of the financial system is a very difficult task given the complex nature of the financial system and the existence of numerous interactions between financial market participants, non-financial sectors and financial institutions. Our empirical work started with constructing an aggregate banking stability indicator as an attempt to assess the risks to financial stability by focusing on a set of key financial soundness indicators of banks. But given the complex interactions of different elements of the financial system among themselves and the real economy, from the analysis of an early warning indicator to monitor the state of the banking system, the analytical focus has been shifted towards a broader system-wide assessment of risks to the financial markets, institutions and infrastructure. In other words, we developed a financial conditions index which provides a signal of financial stress and broad coverage of the areas that could indicate it. Both composite measures of financial stability can be used to gauge the build-up of imbalances in the system even in the absence of extreme events. In addition, we also demonstrate that it is possible to use our financial measures to improve, although only marginally, upon forecasts of measure of economic activity over short horizon.

Suggested Citation

  • Magdalena Petrovska & Elena Mucheva Mihajlovska, 2013. "Measures of Financial Stability in Macedonia," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 2(3), pages 85-110.
  • Handle: RePEc:cbk:journl:v:2:y:2013:i:3:p:85-110
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    File URL: http://www.cb-cg.org/repec/cbk/journl/vol2no3-5.pdf
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    References listed on IDEAS

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    1. Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2004. "Balance Sheets and Exchange Rate Policy," American Economic Review, American Economic Association, vol. 94(4), pages 1183-1193, September.
    2. Kraft, Evan & Galac, Tomislav, 2007. "Deposit interest rates, asset risk and bank failure in Croatia," Journal of Financial Stability, Elsevier, vol. 2(4), pages 312-336, March.
    3. Scott Brave & R. Andrew Butters, 2011. "Monitoring financial stability: a financial conditions index approach," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 22-43.
    4. Gary C. Zimmerman, 1996. "Factors influencing community bank performance in California," Economic Review, Federal Reserve Bank of San Francisco, pages 26-40.
    5. Adalbert Winkler & Francesco Mazzaferro & Carolin Nerlich & Christian Thimann, 2004. "Official dollarisation/euroisation - motives, features and policy implications of current cases," Occasional Paper Series 11, European Central Bank.
    6. Stock J.H. & Watson M.W., 2002. "Forecasting Using Principal Components From a Large Number of Predictors," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 1167-1179, December.
    7. Carolina Osorio & Filiz D Unsal & Runchana Pongsaparn, 2011. "A Quantitative Assessment of Financial Conditions in Asia," IMF Working Papers 11/170, International Monetary Fund.
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    Citations

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    Cited by:

    1. Kristína Kočišová & Daniel Stavárek, 2015. "Banking Stability Index: New EU countries after Ten Years of Membership," Working Papers 0024, Silesian University, School of Business Administration.
    2. Akosah, Nana & Loloh, Francis & Lawson, Natalia & Kumah, Claudia, 2018. "Measuring Financial Stability in Ghana: A New Index-Based Approach," MPRA Paper 86634, University Library of Munich, Germany.

    More about this item

    Keywords

    Banking Stability Index; Banking Sector’s Financial Strength; Financial Conditions Index; Financial Stability; Principal Component Analysis;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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