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Assessing Romanian financial sector stability: the importance of the international economic climate

Albulescu, Claudiu Tiberiu (2008): Assessing Romanian financial sector stability: the importance of the international economic climate.

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Abstract

The aim of this paper is to develop an aggregate stability index for the Romanian financial system. The index which is meant to enhance the set of analysis used by the central bank to assess the financial stability accurately reflects the financial stability dynamics and the periods with financial turbulences during 1997-2007 in Romania. By the application of a technique which enables the measurement of the components’ contribution to the aggregate index volatility, we show that some individual stability indicators require a close monitoring by the authorities in order to detect the instability periods. Several attempts to set up a financial stability aggregate index can be found in the literature, but none of these studies took into consideration the spillover effect between different financial markets. One of the contributions of our paper is the introduction within the aggregate index of an indicator capable of highlighting the international economic climate. The deterioration of the world economic climate can represent the background for the contagion phenomenon. The outcome of the study shows an improvement of the Romanian financial stability during the analysed period. The aggregate index volatility also decreased starting with 1999. The financial vulnerability and financial soundness indicators have a significant contribution to the volatility of the aggregate index in the periods foregoing the crisis appearance. On the contrary, the volatility of the world economic climate indicators is reduced before the crisis, rising immediately after its burst out.

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