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: US Dollar comeback in the makes?
The US Dollar stands victorious at the end of another week, with the EUR/USD pair trading near a four-week low of 1.1742, while the USD retains its strength despite some discouraging American data released at the end of the week. The pair edged higher on Friday, after the United States Supreme Court ruled against President Donald Trump's tariffs, although the advance is not enough to change the latest USD flow.
GBP/USD braces for more pain, as 200-day SMA tested
GBP/USD broke the previous week’s consolidation to the downside, as sellers returned with pomp, smashing the major back toward the levels last seen in late January. The pair tested bids below the 1.3450 barrier as the US Dollar strength largely played out throughout the week, while the Pound Sterling stepped back on expectations of divergent monetary policy outlooks between the Bank of England and the US Federal Reserve.
USD/JPY sticks to gains above 155.00, over one-week top ahead of US data
The USD/JPY pair gains positive traction for the third straight day and climbs to over a one-week top, around the 155.35-155.40 region. Data released early today showed that Japan’s key inflation gauge eased to the slowest pace in two years, tempering expectations for an immediate policy tightening by the Bank of Japan.
Editors’ Picks
EUR/USD: US Dollar comeback in the makes?
The US Dollar stands victorious at the end of another week, with the EUR/USD pair trading near a four-week low of 1.1742, while the USD retains its strength despite some discouraging American data released at the end of the week. The pair edged higher on Friday, after the United States Supreme Court ruled against President Donald Trump's tariffs, although the advance is not enough to change the latest USD flow.
GBP/USD braces for more pain, as 200-day SMA tested
GBP/USD broke the previous week’s consolidation to the downside, as sellers returned with pomp, smashing the major back toward the levels last seen in late January. The pair tested bids below the 1.3450 barrier as the US Dollar strength largely played out throughout the week, while the Pound Sterling stepped back on expectations of divergent monetary policy outlooks between the Bank of England and the US Federal Reserve.
Gold climbs to weekly tops, approaches $5,100/oz
Gold keeps the bid tone well in place at the end of the week, now hitting fresh weekly highs and retargeting the key $5,100 mark per troy ounce. The move higher in the yellow metal comes in response to ongoing geopolitical tensions in the Middle East and modest losses in the US Dollar.
Week ahead: Markets brace for heightened volatility as event risk dominates
Dollar strength dominates markets as risk appetite remains subdued. A Supreme Court ruling, geopolitics and Fed developments are in focus. Pivotal Nvidia earnings on Wednesday as investors question tech sector weakness. Yen and aussie diverge; both pound and euro could recoup their losses.
Broadening drivers of growth: Unpacking GDP and looking ahead
This week’s data delivered a familiar theme with an important twist. The U.S. economy continues to be shaped by powerful forces in high-tech and AI-related investment, but recent releases suggest the growth story may finally be broadening. At the same time, trade flows are moving in a less supportive direction, reminding us that not all parts of the economy are pulling in sync.
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