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Financial and Monetary Integration in the New Europe

Convergence Between the EU and Central and Eastern Europe

Edited by David G. Dickinson and Andrew W. Mullineux

Potential new entrants to the European Union from Central and Eastern European countries face many challenges to achieve financial convergence with the existing EU nations. Using detailed case studies from Bulgaria, the Czech Republic, Latvia, Lithuania and Poland and analysis of cross country data from these regions, Financial and Monetary Integration in the New Europe looks at the key issues for applicant countries as they negotiate the terms of their membership in the European Union. Of major concern to these countries is the financial sector and its implications for economic growth and the conduct of macroeconomic policy. The book examines, in particular, monetary and exchange rate policies, banking regulation and financial market efficiency. The overall impact of building a market driven financial system on economic development is also explored.
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Chapter 12: Financial stability and economic development in transnational economies

Convergence Between the EU and Central and Eastern Europe

Maxwell J. Fry


12. Financial stability and economic development in transitional economies Maxwell J. Fry INTRODUCTION In most countries, central banks are responsible for financial stability as well as monetary policy and the national or wholesale payment systems. For example, the Bank of EnglandÕs mission statement specifically recognizes the promotion of financial stability as one of the BankÕs core purposes. Gerry Corrigan, former President of the Federal Reserve Bank of New York, also recognized this important role when referring to the ÔtrilogyÕ of central banking functions and responsibilities: monetary policy, banking supervision and payment systems. In the transitional economies, expertise formed one serious constraint to ensuring financial stability in the early years (Knight et al. 1997). Not only was expertise scarce in the central bank but also within the financial sector as a whole. Unsurprisingly, therefore, the rapid transformation from a monobanking system into a two-tier banking system produced casualties, instability and fragility. Many gaps existed in the financial landscape in terms of institutions and markets that typically constitute financial sectors in the industrial countries. Central bankers also faced uncompetitive and uncooperative commercial banking systems. Much has changed over the past decade in the transitional economies. But some transitional economies have adapted to their new environments more quickly and successfully than others. So there is perhaps more diversity now than there was at the outset. Nevertheless, there are several common features of the process of financial liberalization and financial development in the transitional economies. For example, the prevalence of insolvent commercial...

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