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Financial Stability Essay

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Below is an essay on "Financial Stability" from Anti Essays, your source for research papers, essays, and term paper examples.

What is Financial Stability?
This question can best be answered by considering its absence—the failure to attain it through the
presence of financial instability. To answer this question two distinct issues must be resolved: the
basis on which “financial instability” can be distinguished from other sources of instability and the
basis for identifying the presence of “instability” in the financial sector. Both raise further
questions. With respect to the first, financial instability is only one form of economic instability to
which an economy can be subject. Are there clear dividing lines between financial instability and
other types of instability, such as macroeconomic instability? If so, what distinguishes “financial”
instability from the others?
Just as fundamental is the question of instability itself. Market prices and interest rates continually
fluctuate. These fluctuations contribute to the vitality of a market economy by providing the
familiar signalling and rationing functions of markets. But such changes in prices and interest rates
continually alter the balance sheets of both households and business enterprises. Are all
movements of interest rates and prices signs of instability? What criteria distinguish instability
from changes that characterize the normal working of a market economy?
2.1 The financial dimension of instability
Financial instability refers to conditions in financial markets that harm, or threaten to harm, an
economy’s performance through their impact on the working of the financial system. It can arise
from shocks that originate within the financial system being transmitted throughout that system, or
from the transmission of shocks that originate elsewhere by way of the financial system. Such
instability harms the working of the economy in various ways. It can impair the financial condition
of non-financial units such as households, enterprises, and governments to the degree that the flow
of finance to them becomes restricted. It...

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Financial Stability. Anti Essays. Retrieved June 16, 2018, from the World Wide Web: https://www.antiessays.com/free-essays/Financial-Stability-153279.html