Price stability, financial stability and fiscal sustainability are part of the necessary conditions for the balanced development of an economy in the longer run. They can be considered as pillars on which the ‘economic house’ is built. Weakness or fragility of one pillar -e.g. inflation well above target, overvalued asset prices or a high and rising public debt ratio - may impact the solidity of the other pillars and weaken the overall structure. This gives rise to a debate about the nexus between these three conditions. Given these interactions, it is important that each policy -monetary, fiscal, financial stability oriented- is conducted in a way that takes into account its influence on the other objectives. This should enhance overall economic stability.
Price stability, financial stability and fiscal sustainability are part of the necessary conditions for the balanced development of an economy in the longer run.
Price stability corresponds to a rate of inflation that on a sustained basis is in line with the objective of the central bank. The definition of financial stability is more complex. According to the IMF, it refers to the ability of the financial system to perform three tasks. Firstly, facilitating an “efficient allocation of economic resources—both spatially and especially intertemporally—and the effectiveness of other economic processes (such as wealth accumulation, economic growth, and ultimately social prosperity)”. Secondly, assessing, pricing, allocating and managing financial risks. Thirdly, maintaining “its ability to perform these key functions—even when affected by external shocks or by a buildup of imbalances—primarily through self-corrective mechanisms.”
Finally, fiscal sustainability can be associated with a stable public debt to GDP ratio. However, other aspects should also be taken into account: the ratio of debt service to fiscal revenues, the foreign currency share of foreign debt, the sensitivity of debt dynamics to interest rate and growth shocks, the expected impact of population ageing on health care expenditures and pension payments, etc.
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Editors’ Picks
AUD/USD consolidates below 0.6600; remains close to multi-month low
AUD/USD extends its consolidative price move on Tuesday and holds steady above its lowest level since August 8 touched last week amid mixed cues. Concerns about US President-elect Donald Trump's protectionist policies, the disappointment over China's fiscal stimulus and the underlying strong bullish sentiment surrounding the USD act as a headwind for the pair.
USD/JPY ticks lower amid intervention fears; downside potential seems limited
USD/JPY edges lower during the Asian session on Tuesday amid fears that Japanese authorities might intervene in the markets. Doubts over the BoJ's ability to hike rates again, fears that the US President-elect Donald Trump might again hit Japan with protectionist trade measures and elevated US Treasury bond yields should cap the JPY.
Gold price struggles to lure buyers amid elevated US bond yields, bullish USD
Gold price hangs near a one-month low touched on Monday and seems vulnerable below the 50-day SMA. Expectations that US President-elect Donald Trump's expansionary policy will boost inflation and force the Fed to delay its easing cycle remain supportive of elevated US Treasury bond yields. This favors the USD bulls and validates the negative outlook for the XAU/USD.
How high can Bitcoin go? Prediction markets suggest $100K
Bitcoin is consistently setting new record highs on Monday after breaking above $89K. The continued uptrend has led asset managers like Bernstein to urge investors to consider adding Bitcoin exposure to their portfolios.
Five fundamentals: Fallout from the US election, inflation, and a timely speech from Powell stand out Premium
What a week – the US election lived up to their hype, at least when it comes to market volatility. There is no time to rest, with politics, geopolitics, and economic data promising more volatility ahead.
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