Economic Stability and Monetary Policy

Topic: Economics
Words: 860 Pages: 3


Economic stability and complexity of the financial system are indicators of the efficiency of state management and its welfare. Nevertheless, in spite of a large number of specialists and rich experience, modern systems can be called highly developed but not perfect. Analyzing how well a modern economic structure is prepared for volatility or economic turbulence is necessary. In other words, what is done to ensure that any external factors allow financial systems not to experience serious losses?

Stability and Principles of Work

In advanced economies, modern money markets emerged after World War II as a result of restrictive banking regulations. For the first decades of their existence, money markets were a platform where investors with excess cash interacted with short-term borrowers through over-the-counter unsecured loans made by commercial banks. Over the past thirty years, the rapid development caused by globalization and deregulation has significantly increased the demand for capital, which could only be met through new instruments created through technological and financial innovation (Beker, 2019). As a result, money markets have evolved from exchanges of over-the-counter unsecured loans between a few credible institutions to much more sophisticated platforms with their own securities, secured lending, and interest rate derivatives, all of which have different maturities and are available to a wide range of participants.

The emergence of bills, such as liquid treasury bills, was one of the most effective stimuli for the development of markets because it was thanks to this resource that increased the role of public debt. An additional impetus for the issuance of short-term securities by governments and central banks was the development of modern monetary policy operations and financing through secured transactions, such as repurchase agreements. The increased scale, size, and complexity of financial markets, including money markets, in recent decades have been facilitated by increased economic and financial volatility, globalization and increased international capital flows, the development of financial market theory and financial techniques, and significant increases in computer power and rapid communication systems.

Among other changes, the crisis has increased the importance of secured versus unsecured lending, reduced interbank lending volumes and average transaction terms, and changed the nature of interbank financing (Wang, 2019). Many emerging economies have had difficulty establishing an interbank market, and, ironically, with the beginning of the IFC, the Eurozone faced a similar problem as it attempted to restart the paralyzed interbank market.

An important observation in the field of money market development is that price stability contributes to financial development and thus strengthens financial stability. A realistic inflation target with a flexible exchange rate stimulates financial markets by making interest rate developments more predictable and thus more useful for pricing long-term financial instruments in local currency. Moreover, it reduces the attractiveness of holding savings and setting prices in foreign currency, and, by reducing the dollarization of the economy, the degree of currency mismatches in household and enterprise balance sheets is reduced (Wang, 2019). The resilience of the financial sector to external changes is strengthened by the priority of fiscal policy aimed at price stability. Despite the widespread belief that a fixed exchange rate can also ensure price stability if it is held reliably over the long term, experience in many developed and developing economies shows that exchange rate parity adjustments become unavoidable from time to time, and the resulting shocks are difficult to manage, often leading to protracted economic crises. In contrast, an emphasis on price stability, as opposed to exchange rate stability, requires the creation of mechanisms to control exchange rate volatility and its economic consequences. Financial instruments of the market develop precisely through the creation of such mechanisms.

Monetary Policy Regime

The choice of a monetary policy regime that ensures price stability has important implications for the development of domestic monetary and financial markets. In particular, the experience of many emerging and frontier economies shows that inflation targeting and exchange rate flexibility contribute more to financial market development than exchange rate targeting or monetary targeting (Schneider, 2018). This is because this system reduces the incentives to strengthen money markets because it does not require all the functions that money markets can provide.

A basic feature of all modern economies is that the government has established a particular currency as the unit of account to be used in all government and commercial transactions. Maintaining confidence in the unit of account over time plays a crucial role in encouraging households and businesses to make investment and spending decisions, thereby promoting sustained economic growth and shared prosperity (Schneider, 2018). The value of the currency is protected by the authorities so that the foreign policy regime is focused on such vectors.


The main conclusion is that the economy is growing in spite of external factors and disturbances, which is due to the following. The result of the development is flexibility and versatility, which in difficult periods, contributes to a rapid reorientation. In other words, assets and priorities change, and the banking system, along with new technologies, does not bear large losses at the same time. On the basis of all this, it is possible to conclude that the modern economy is well-prepared for turbulence and foresees many potentially dangerous factors.


Beker, V. A. (2019). Alternative approaches to economic theory. Complexity, post-Keynesian and ecological economics. Taylor & Francis.

Schneider, G. (2018). The evolution of economic ideas and systems. A pluralist introduction. Taylor & Francis.

Wang, Z. (2019). The principle of trading economics. Springer Singapore.

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