FINANCIAL STABILITY IN AN OPEN MARKET ECONOMY: A HOLISTIC APPROACH TO ECONOMIC POLICY
FINANCIAL STABILITY IN AN OPEN MARKET ECONOMY: A HOLISTIC APPROACH TO ECONOMIC POLICY

Author(s): Marijana Mitrović Mijatović
Subject(s): Economy, Business Economy / Management, Accounting - Business Administration
Published by: ASERS Publishing
Keywords: financial stability; systemic risk; monetary policy; open economy; euroisation
Summary/Abstract: Financial stability does not have a precise definition. A stable financial system implies a state of institutional, regulation and an open 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 the 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 the 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 the basic functions in a safe and sound financial market. In open economies, especially those with the choice of a more fixed exchange rate policy framework such as euroisation, monetary policy instruments become less effective and limited. In such a policy situation, the maintenance of financial stability becomes more important and targets not only monetary policy but also the overall macroeconomic policy stance. The institutional and legal framework aims to create a financial infrastructure that would initiate preventive actions to preserve stability and prevent the development of a crisis which is the final phase of instability.

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