engleski

Developing an Aggregate Index for Measuring Financial Stability in the Balkans

Financial stability continues to grow in importance and remains a hotly debated topic since the turn of the new century brought a string of financial episodes that culminated with the Global financial crisis of 2007. While the Balkans have traditionally been considered to lie on the periphery of financial phenomena, this wide assessment of the region has changed with the large-scale turmoil caused by the Greek Sovereign Debt crisis. Therefore, to curb nascent instability, financial authorities should remain alert and devise a mechanism able to effectively detect stress in their respective financial systems. So far – in the quest to build a comprehensive and universal Early Warning System – a number of broad measures and indicators have been proposed ; however, none of them have been specifically tailored to reflect the distinct character of the Balkan countries with their diverse, yet analogous political, social and economic idiosyncrasies. This paper attempts to tackle this issue from a financial policy standpoint by contributing to the current literature on the subject in three separate ways. First, it builds upon the most recent findings in this area to develop an aggregate financial stability index that measures financial stability levels in nine countries geographically belonging to the Balkan region, entirely or at least in part. Most importantly, this index juxtaposes some well known IMF- backed Financial Soundness and macroprudential indicators with World Bank development indicators and CESifo measures of world economic climate. Second, the authors perform a Chanut-Laroque analysis of contribution to volatility levels in the aggregate stability index in order to explore which sub-indexes can explain the improvement or deterioration of the index value for the 1995-2011 period. Third, this paper compares and contrasts the evolution of financial stability of two sub-indices reflecting the diverging nature of the two groups of countries (Western Balkans vs. EU members) regarding their standing relative to European Union status.

Financial stability ; Balkans ; financial soundness indicators ; index construction ; aggregation

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