Measures of Financial Stability in Macedonia

Magdalena Petrovska () and Elena Mucheva Mihajlovska ()
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Magdalena Petrovska: National Bank of the Republic of Macedonia
Elena Mucheva Mihajlovska: National Bank of the Republic of Macedonia

Journal of Central Banking Theory and Practice, 2013, vol. 2, issue 3, 85-110

Abstract: This paper aims at reviewing the work done towards developing quantitative measures of financial stability in Macedonia. The approach to the development of these measures concerns the macro-prudential dimension of financial stability. Constructing a single indicator to indicate the level of stability of the financial system is a very difficult task given the complex nature of the financial system and the existence of numerous interactions between financial market participants, non-financial sectors and financial institutions. Our empirical work started with constructing an aggregate banking stability indicator as an attempt to assess the risks to financial stability by focusing on a set of key financial soundness indicators of banks. But given the complex interactions of different elements of the financial system among themselves and the real economy, from the analysis of an early warning indicator to monitor the state of the banking system, the analytical focus has been shifted towards a broader system-wide assessment of risks to the financial markets, institutions and infrastructure. In other words, we developed a financial conditions index which provides a signal of financial stress and broad coverage of the areas that could indicate it. Both composite measures of financial stability can be used to gauge the build-up of imbalances in the system even in the absence of extreme events. In addition, we also demonstrate that it is possible to use our financial measures to improve, although only marginally, upon forecasts of measure of economic activity over short horizon.

Keywords: Banking Stability Index; Banking Sector’s Financial Strength; Financial Conditions Index; Financial Stability; Principal Component Analysis (search for similar items in EconPapers)
JEL-codes: E17 E44 E5 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:cbk:journl:v:2:y:2013:i:3:p:85-110

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