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Price stability, financial stability and fiscal sustainability are part of the necessary conditions for the balanced development of an economy in the longer run. They can be considered as pillars on which the ‘economic house’ is built. Weakness or fragility of one pillar -e.g. inflation well above target, overvalued asset prices or a high and rising public debt ratio - may impact the solidity of the other pillars and weaken the overall structure. This gives rise to a debate about the nexus between these three conditions. Given these interactions, it is important that each policy -monetary, fiscal, financial stability oriented- is conducted in a way that takes into account its influence on the other objectives. This should enhance overall economic stability.

Price stability, financial stability and fiscal sustainability are part of the necessary conditions for the balanced development of an economy in the longer run.

Price stability corresponds to a rate of inflation that on a sustained basis is in line with the objective of the central bank. The definition of financial stability is more complex. According to the IMF, it refers to the ability of the financial system to perform three tasks. Firstly, facilitating an “efficient allocation of economic resources—both spatially and especially intertemporally—and the effectiveness of other economic processes (such as wealth accumulation, economic growth, and ultimately social prosperity)”. Secondly, assessing, pricing, allocating and managing financial risks. Thirdly, maintaining “its ability to perform these key functions—even when affected by external shocks or by a buildup of imbalances—primarily through self-corrective mechanisms.”

Finally, fiscal sustainability can be associated with a stable public debt to GDP ratio. However, other aspects should also be taken into account: the ratio of debt service to fiscal revenues, the foreign currency share of foreign debt, the sensitivity of debt dynamics to interest rate and growth shocks, the expected impact of population ageing on health care expenditures and pension payments, etc.

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Editors’ Picks

EUR/USD stays below 1.1100, looks to post weekly losses

EUR/USD stays below 1.1100, looks to post weekly losses

EUR/USD continues to trade in a narrow range below 1.1100 and remains on track to end the week in negative territory. Earlier in the day, monthly PCE inflation data from the US came in line with the market expectation, failing to trigger a reaction.

EUR/USD News
GBP/USD struggles to find a foothold, trades near 1.3150

GBP/USD struggles to find a foothold, trades near 1.3150

GBP/USD stays on the back foot and trades in negative territory at around 1.3150 on Friday. The US Dollar holds its ground following the July PCE inflation data and doesn't allow the pair to stage a rebound heading into the weekend.

GBP/USD News
USD/JPY stays pressured below 145.00 after hot Tokyo inflation data

USD/JPY stays pressured below 145.00 after hot Tokyo inflation data

USD/JPY remains under pressure below 145.00 in Asian trading on Friday, The Japanese Yen is underpinned by hot Tokyo annual CPI data, which fans hawkish BoJ expectations. The pair's downside, however, is cushioned by the recent US Dollar strength and a better mood. US PCE eyed. 

USD/JPY News

Editors’ Picks

EUR/USD stays below 1.1100, looks to post weekly losses

EUR/USD stays below 1.1100, looks to post weekly losses

EUR/USD continues to trade in a narrow range below 1.1100 and remains on track to end the week in negative territory. Earlier in the day, monthly PCE inflation data from the US came in line with the market expectation, failing to trigger a reaction.

EUR/USD News
GBP/USD struggles to find a foothold, trades near 1.3150

GBP/USD struggles to find a foothold, trades near 1.3150

GBP/USD stays on the back foot and trades in negative territory at around 1.3150 on Friday. The US Dollar holds its ground following the July PCE inflation data and doesn't allow the pair to stage a rebound heading into the weekend.

GBP/USD News
Gold retreats toward $2,500 ahead of the weekend

Gold retreats toward $2,500 ahead of the weekend

Gold stays under modest bearish pressure and declines toward $2,500 in the American session on Friday. The 10-year US Treasury bond yield edges higher toward 3.9% after US PCE inflation data, causing XAU/USD to stretch lower.

Gold News
Week ahead – Investors brace for NFP amid Fed rate cut speculation

Week ahead – Investors brace for NFP amid Fed rate cut speculation

Here comes another NFP week, with investors eagerly awaiting the results as they try to discern the size and pace of the Fed’s forthcoming rate cuts. The weaker than expected July numbers triggered market turbulence, instilling fears about a potential recession in the US.

Read more
Easing Eurozone inflation to back an ECB rate cut in September

Easing Eurozone inflation to back an ECB rate cut in September Premium

Eurostat will publish the preliminary estimate of the August Eurozone Harmonized Index of Consumer Prices on Friday, and the anticipated outcome will back up the case for another European Central Bank interest rate cut when policymakers meet in September.

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