Risk Of Financial Instability Research Articles

Impact of fiscal and monetary policy on inflation in Vietnam

High and sustainable growth of gross domestic product with stable inflation is one of the objectives of the most macroeconomic policies both in the world and in Vietnam. Therefore, price stability plays a vital role in assuring GDP growth. In order to stabilize prices, fiscal and monetary policies need to be appropriately managed. The aim of this study is to assess the impact of the monetary and fiscal policies on inflation in Vietnam during the period from 1997 to 2020. This study has applied the vector autoregression (VAR) model along with data gathered from the World Bank and General Statistics Office of Vietnam. The research results indicate that Vietnam’s inflation is positively influenced by a fiscal deficit (2.943), money supply (2.672), government expenditure (8.347), and interest rate (3.187). Among the factors, government expenditure has the biggest influence on inflation. Besides, trade openness (–0.311) also influences inflation, but the effect is negative and negligible. Finally, the policy implications are focused on coordinating fiscal and monetary policies maintaining a moderate level of inflation for economic growth. AcknowledgmentThis article is funded from the funding source of the research: “Solutions to deal with the risk of financial instability from support packages to fight economic recession caused by the covid-19 pandemic” with code B2022-MHN-02 by Vietnam Misnistry of Education and Training.

Bank Regulation in the Economies in Transition

Given that banking in economies of transition fluctuate heavily, we explore the effect of regulatory norms on performance of banking industry. In particular, we examine the effect of Reserve Requirements, Activity Restrictions, and Capital Stringencies on the overall industry profitability and stability of the financial institutions. We utilize the Generalized Methods of Moments methodology to the panel data regressions over 17 different transitional economies during, and after the crisis period of 2008 through to 2019. Our results show that the Reserve Requirements regulatory norm is the only significant factor that improves the profitability and diminishes the risk of financial instability. The findings are confirmed with our tests over the regional sub-samples. This research sheds the light on the necessities of political and economic reforms in banking for these markets in transition.

Financial strategy for large coal producers

Relevance of the study. In the current context, there are quite negative trends in the coal industry: instability of the situation in the coal markets and increased competition, which creates risks of financial instability of enterprises. In these conditions, it is important to develop a financial strategy aimed at fulfilling promising production tasks. The purpose of the study is to substantiate the financial strategy of large coal producers. Research methods – scientific generalization, logical analysis, methods of comparison and analogies. Results of the study. The key points of the financial strategy have been identified: the goal of the effective development of a coal producer; time – long-term benchmarks; mechanisms – financing; directions – the implementation of financial activities; conditions – external and internal environment. The development of a financial strategy is based on a system of financial ratios used to form an acceptable structure of working capital. Calculation formulas are proposed to determine the required amount of cash, short-term financial investments, accounts receivable and the amount of stock in the composition of working capital. The quantitative values of these indicators that are acceptable from the point of view of the financial strategy have been determined: not less than 25%, not more than 25%, not more than 50%, respectively. The set of financial ratios for the formation of an acceptable ratio of own and borrowed funds, their calculation formulas and recommended values are recommended. The values of the coefficient Kз/с of the ratio of borrowed and own funds, which determines the possibility of using borrowed funds, are given. In direct connection with Кз/с, the autonomy coefficient is considered and its reasonable values are justified. Conclusions. The specified conditions for the formation of a financial strategy are primarily related to large coal producers, where there are opportunities for revenue growth and a reduction in the duration of the production cycle. The proposed acceptable values of financial ratios will make it possible to achieve sustainable financial independence of enterprises and ensure their effective development.

Should monetary policy lean against the wind in a small-open economy? Revisiting the Tinbergen rule

Abstract While conventional monetary policy maintains its role in counteracting inflation, there are doubts that it is sufficient to guard against the risks of financial instability. It has been debated whether monetary policy should lean against the wind, i.e., if central banks should also respond to the build-up of financial imbalances, such as those associated with unsustainable credit expansion. In the spirit of the Tinbergen rule, some authors have claimed that monetary policy is ineffective in achieving price and financial stability simultaneously. However, others have argued that monetary policy could play a role in taming the credit cycle without compromising its effectiveness to control inflation efficiently. Until now, this analysis has been mostly carried out in a closed-economy setting. I contribute to the debate by showing that targeting the two policy objectives with a single instrument is more costly for a small-open economy than for a closed one. To this end, I develop a small-open economy DSGE model with the Bernanke-Gertler-Gilchrist financial accelerator that features financial frictions and monopolistic competition in goods markets. I then estimate this model for Mexico to explore the policy regimes yielding the lowest welfare cost. My main finding is that the Tinbergen rule is alive and well: Leaning against the wind or augmenting the Taylor rule with an argument on credit growth is not an optimal policy response; instead, the optimal policy mix consists of using two separate tools that focus each on price and financial stability. At the same time, these instruments complement each other to stabilize the economy under financial shocks. Nevertheless, macroprudential measures may not be as useful in helping economic stability under different shocks, particularly when a productivity shock hits the economy. In addition, my model is useful to gauge macroprudential measures effectiveness when discriminating against foreign liabilities. In this regard, I find that macroprudential measures that consider both internal and external debt are more effective than capital controls.

Пандемия COVID-19: реакция мировых центральных банков на экономический спад

Measures to mitigate the effects of the COVID 19 pandemic on households and businesses taken by Western governments in 2020 had serious negative consequences for the global economy. There was a widespread fall of production and trade, the closure of enterprises and stagnation of entire industries, sharp increase in unemployment, rise of uncertainty and risks. In an effort to slow the development of economic downturn the central banks and the Treasuries had taken wide range of monetary measures. Some of which were the continuation of the programs initiated during the period of global financial crisis of 2007–2009 and adapted to the current economic situation and the others represented new programs for the purchase of financial assets and granting credit facilities to enterprises and households. These actions, aimed primarily at the issue of additional quantities of money into the circulation, were distinguished by very large scale and high speed of decision-making. The author’s analysis led to a conclusion that the monetary policy during COVID 19 pandemic helped to stabilize financial markets, preserved the activities of a part of small and medium-sized enterprises and improved employment in the labor market. At the same time, massive “quantitative easing” operations increased the risk of financial instability and the likelihood of emerging of difficult-to-control inflationary spiral in Western economies. As to the achievement of strategic goals of monetary policy in the macroeconomic sphere, the success was much less noticeable due to the influence of many nonmonetary factors on the level of employment and the rate of economic growth.

From cash to private and public digital currencies. The risk of financial instability and “modern monetary Middle ages”

The article analyzes the unstable equilibrium between further developing national monetary systems by means of (private/public) digital currencies while maintaining financial stability as secured by “tangible” store of values like notes/coins. Which are those elements of innovation improving today’s payments system? And, at the same time, which modern trends might destabilize the above-mentioned equilibrium? The paper will identify fundamental monetary principles to be respected, no matter what the innovation level in post-modern economies might soon look like. Cryptocurrencies will be also compared to central bank digital currencies (CBDC), which might soon complement or even replace notes and coins. But, is cash truly a “barbarous relic”? And, which impact might have its legal limitation (as occurring in several European countries)?

Az expanzív monetáris politika és a pénzügyi buborékok interakciója

Although the expansionary monetary policy stance in the years following the crisis has greatly contributed to economic recovery, it is also important to take into consideration the unintended side effects. Although the level of inflation has remained subdued throughout, the huge amount of money spent on the economy has not disappeared without trace. It is important to pay attention on the consequences of the further deepening of existing inequalities, the risk of financial instability and the formation of bubbles caused by asset price increases in the markets of different instruments. The aim of the research is to take into account the risks associated with the above topic, in particular the risks of asset price bubbles and the possible responses and challenges which may affect the area of monetary policy. The study also details the theoretical context of fi nancial bubbles and the risks of quantitative easing to fi nancial instability and bubble formation.

Four-G Episode and the elevated risks

Complacency and a false perception that markets will correct imbalances during two decades of ‘Great Moderation’ led to ‘Global Imbalances’. The low interest rates and a lack of proper oversight, combined with a perception that housing prices will always move north, brought the sub-prime crisis in the USA and the subsequent ‘Global Financial Crisis’ and European crisis. The Quantitative Easing policy in advanced economies (AE) created an even more permissive global liquidity. The externality affecting emerging markets (EM) took the form of massive capital inflows, first channelled through banks where the global banks-mostly headquartered in Europe-played a significant role and then through capital market with fund managers being the protagonist. The augmented liquidity spurred growth in EM but also elevated the risk of financial instability. Capital flows reversal, slower growth and less benign external conditions have put EM in a quandary. The uncertainty is heightened by a non-synchronised monetary policy in AE (‘Great Divergence’). To the extent that standard policies have become ineffective, and to defend from externality caused by AE's unilateral policy (financial nationalism), it is argued that EM can put a damper on the dangerous component of capital inflows. As part of macroprudential policy, such a measure is equivalent with discouraging risky behaviour to prevent financial instability and worsening income inequality.

Financial integration and stability in the Southern African development community

One of the benefits of financial integration is that it enhances financial stability because openness to international competition requires that countries conform to international standards of reporting and financial regulation. Moreover, financial integration facilitates transfer of technology and know-how that improves efficiency and stability in the domestic financial sector. However, a significant threat of financial integration is the risk of financial instability. This study tests the hypothesis that deeper financial integration causes financial instability in the domestic financial systems. The study performs a panel causality test based on feasible generalised least squares (FGLS) technique to test the validity of this hypothesis in the Southern African Development Community (SADC). The findings validate the hypothesis and reveal the importance of effective monetary policy, real interest rate and exchange rate policies to curb financial instability and achieve a narrow financial intermediation spread.

Capital Adequacy and Risk Management – Premises for Strengthening Financial System Stability

In the last decades, we have witnessed the progressive integration of European financial system, as a result of the cumulative effect of markets' liberalization, innovation and globalization, and of harmonization of the regulations and implementation of financial reforms by the EU Member States. In this context, increased risk of financial instability necessarily requires the development of standards and codes of best practices in order to improve financial system integrity and stability, and to insure the health of the global banking and financial markets. From this perspective, the Basel II Accord represents a true revolution, aiming the improvement of the consistency of capital regulations internationally and better operational risk management practices. As a member of the EU, Romania is currently through the stages of implementation of Basel II, starting January 1, 2008. As a central bank, NBR main objectives are: to adapt national legislation; to coordinate the efforts of credit institutions to develop new strategies regarding solvency, capital adequacy and measurement system for each risk category; to impose the disclosure requirements for financial reports and to adapt the IT system.

A atuação do Fed antes e depois do estouro da bolha imobiliária: discricionariedade e mandato de bancos centrais em contexto de desregulamentação financeira

A atuação do Federal Reserve System - Fed - durante a formação e estouro da bolha imobiliária mostra as dificuldades de um banco central em processos financeiros de grande magnitude. O Fed foi leniente com o desenvolvimento da bolha, por considerar que a alta do preço dos imóveis ajudava a reduzir os riscos de instabilidade financeira gerados pelas crises de 2000-2002. Quando a crise do mercado subprime se tornou aguda, em setembro de 2008, o Fed atuou agressivamente como emprestador de última instância, expandindo a base monetária para conter os riscos de inadimplência generalizada no mercado interbancário. Nos dois momentos, o Fed agiu com pragmatismo e discricionariedade, contrariando as teses dominantes do "Novo Consenso", mas foi "prisioneiro" dessas teses e dos interesses do mercado financeiro: a tese de que a desregulamentação dos mercados favorece a sociedade inibiu iniciativas intervencionistas para restringir as inovações financeiras no mercado imobiliário; a tese de que o mandato da Autoridade Monetária deve ser a estabilidade de preços contribuiu para a leniência com os riscos crescentes nos mercados financeiros.

Capital Flows and Financial Stability: Monetary Policy and Macroprudential Responses

The resumption of capital flows to emerging market economies since mid 2009 has posed two sets of interrelated challenges for policymakers: (i) to prevent capital flows from exacerbating overheating pressures and consequent inflation, and (ii) to minimize the risk that prolonged periods of easy financing conditions will undermine financial stability. While conventional monetary policy maintains its role in counteracting the former, there are doubts that it is sufficient to guard against the risks of financial instability. In this context, there have been increased calls for the development of macroprudential measures, with an explicit focus on systemwide financial risks. Against this background, this paper analyses the interplay between monetary policy and macroprudential regulations in an open economy DSGE model with nominal and real frictions. The key result is that macroprudential measures can usefully complement monetary policy. Even under the optimal policy, which calls for a rather aggressive monetary policy reaction to inflation, introducing macroprudential measures is found to be welfare improving. Broad macroprudential measures are shown to be more effective than those that discriminate against foreign liabilities (prudential capital controls). However, these measures are not a substitute for an appropriate moneraty policy reaction. Moreover, macroprudential measures are less useful in helping economic stability under a technology shock.

Psychiatric remuneration systems in Europe: an overview

SummaryNew forms of psychiatric remuneration linked to levels of activity undoubtedly will have an increasing role to play in mental health systems right across Europe. Potentially they can be more efficient and promote choice, but valid concerns have been raised about their impact on the sustainability and nature of psychiatric care. This article looks in particular at recent developments in England and the Netherlands and reflects on how remuneration mechanisms may need to develop further both to improve efficiency and quality within the context of an ever more fragmented and multi-sectoral mental health system. Any introduction of activity- based reimbursement should be introduced gradually. This should be accompanied by investment in adequate information systems to help better understand service utilisation patterns, transitional funding safeguards to reduce the risk of financial instability and incentives/ contractual measures to ensure that services strive to offer services of the highest possible quality that meet the needs of service users.

Dream of the red financial supermarket: the gradual emergence of integrated financial services provision in China in the 21st century

While the current regulatory trend in the area of banking scope regulation favours integrated financial services provision, China continues to restrict commercial banks’ permissible range of business activities via its 1995 Commercial Bank Law. In this article, we propose an analytical framework that explicitly incorporates the sophistication-level constraint of a country's financial system into the regulatory trade-off calculation between banks’ need for new growth opportunities and an increased risk of financial instability. Applying this framework to China, we first discuss the episode of financial instability that led policy-makers to re-segment the financial industry in 1995 and then analyse the rationale behind China's recent, gradual movement back towards integrated financial services provision. While improved risk management capabilities mean that China may now be ready for a more liberal banking scope regulatory regime, we find that a financial crisis could still derail this important element of China's financial sector reform strategy.

New Policy Challenges from Financial Integration and Deepening in the Emerging Areas of Asia and Central and Eastern Europe

Since the mid-nineties international financial integration has advanced gradually in the emerging areas of Asia, while it has progressed rapidly in Central and Eastern Europe. This process has helped provide long-term benefits for the economies of the two regions in terms of faster productivity growth and deepening of domestic financial markets. The strong surge of international capital inflows since the early years of the current decade has, however, also potentially increased the financial vulnerability and the external sources of contagion for a number of countries, particularly those in Central and Eastern Europe that have seen a significant increase in their foreign borrowing, and also those with still relatively underdeveloped financial systems. We thus analyze the risks of financial instability and asset bubbles in the emerging economies of the two regions, taking into account the degree of development of their domestic financial systems. We conclude by discussing possible policy responses to these challenges by the monetary authorities of the concerned countries.

Current Economic and Financial Conditions

Although the Federal Reserve strongly favors private-sector solutions to private-sector problems, the risk of financial instability in the United States and in much of the rest of the world has implied the need to take extraordinary actions on the part of governments and central banks. The complexity of the problems has in some instances required situation-specific responses. Enactment of the Emergency Economic Stabilization Act, especially the Troubled Asset Relief Program, is an important step to deal with a systemic financial problem of historic dimensions. Fortunately, economic policymakers have learned the lessons of history and have intervened while the majority of financial institutions still have adequate capital and liquidity to provide credit to the economy. Timely government intervention, together with the natural recuperative power of financial markets, will lay the groundwork for financial and economic recovery.

The assessment: financial instability

This paper analyses the causes, consequences, and cures for financial instability based on nine articles on this subject in the Oxford Review of Economic Policy. It argues that the articles suggest a high degree of consensus about the policies required to minimize risks of financial instability and the policies required to tackle it if it emerges.

Banking crises vs. depositor crises: the era of the finnish markka, 1865–19981

This paper represents an attempt to elucidate the chains of events that led to banking crises in Finland during the period 1865-1998. The aim is to use Finnish experience to shed light on the causal mechanism of banking crises and the possibilities of affecting the development of crises. In four of the five cases studied, developments during the bank-crisis cycle in the real and financial sectors conformed to the classical boom-bust cycle, as documented in many previous studies of bank crises. The onset of a recession and the subsequent bank crisis was triggered by a fall in export demand and a rise in real interest rates. The third crisis period differed interestingly from the others, and developments during this crisis show how financial regulation and expansionary policies shifted the burden of the recession from banks to depositors. A particularly worrisome finding is, that, as a result of a marked decline in the solidity of firms during the markka era, the risk of financial instability in Finland has increased significantly.