Systemic Requirements for Monetary Stability in Eastern Europe and the Former Soviet Union
IMF Working Papers, February 1, 1994
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- Systemic Requirements for Monetary Stability in Eastern Europe and the Former Soviet Union
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Bibliographic details
- Authors: Jacek Rostowski
- Published: February 1, 1994
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451920987.001
Summary
- The primary function of banks during economic transformation is provision of an efficient payments mechanism.
- The lack of banking skills, particularly in credit allocation, is identified as the major problem in stable monetary systems.
- This problem can be expected to last many years.
- The proposed solution is to limit banks to very safe assets (initially central bank liabilities).
- Combining such safe banks with a monetary rule would provide stable monetary systems during transition.
Key findings and analysis
- Banks’ most important role in transition economies is ensuring an efficient payments mechanism rather than intermediate-term credit allocation.
- Deficiencies in banking skills—especially in credit allocation—are systemic and persistent risks to monetary stability.
- Constraining banks to hold very safe assets (with central bank liabilities cited as the initial safe asset) reduces risks arising from weak credit allocation capabilities.
- A monetary rule paired with banks holding safe assets is presented as a framework to achieve monetary stability during the transition period.
Policy recommendations
- Limit banks to very safe assets, initially central bank liabilities, to mitigate the effects of weak banking skills on monetary stability.
- Implement a monetary rule to complement the safe-asset banking structure and support stable monetary systems during transition.
Subject areas and keywords
- Subject: Banking, Central banks, Commercial banks, Currencies, Financial institutions, International reserves, Monetary base, Monetary systems, Money
- Keywords: bank, bank assets, bank management, banking system, central bank, commercial bank, Commercial banks, Currencies, debt forgiveness, Eastern Europe, government, International reserves, Monetary base, monetary rule, Monetary systems, money multiplier, PCE banking system, post-communist government, rule, savings bank, state bank, successive bank recapitalization, targeted money aggregate, WP