The global financial system has set as its primary objective to sustain economic growth, achieve a low inflation target, and maintain financial stability.
However, can the sustainability of economic growth, the low inflation target, and financial stability - all of which are important indicators of macroeconomic performance - be achieved simultaneously without contradicting each other?
Before the COVID-19 pandemic, major players in the financial system such as banks tried to sustain economic growth, increase employment, and prevent price increases resulting from supply and demand imbalances by increasing production, i.e., achieving economic growth, with low-interest rates.
However, the increasing looseness in monetary policy during the COVID-19 period, along with the rising energy and logistic costs, created a continuous trend of price increases. This made inflation a global issue.
We know that the primary objective of central banks worldwide is to ensure price stability, that is, to use the necessary monetary policy tools to achieve low inflation. Recently, central banks have been in a race to raise interest rates to reduce inflation.
While the interest rate increases implemented by central banks attempted to weaken the trend of inflation, they negatively affected both economic growth and the financial stability of banks that had become accustomed to low-interest rates with their increased surplus rates. Currently, bank bankruptcies and fluctuations in the United States are primarily the result of these policies.
Financial stability is perhaps the most crucial condition for macroeconomic stability. Especially after the global economic crisis of 2008, ensuring financial stability became one of the most important objectives of central banks.
Because the effectiveness of monetary policies implemented by central banks is predicted to be achieved only with financial stability. Therefore, price stability and financial stability objectives, which are the primary objectives of central banks, are evaluated together.
In this period when financial stability is highly valued and financial stability has gained such acceptance by central banks, there are expectations that the bankruptcy of banks in the United States and the negative effects on European banks that have commercial partnerships with these banks may threaten financial stability, and different scenarios are present regarding how this fluctuation will affect the banks.
Therefore, achieving the three important objectives of sustaining economic growth, achieving the low inflation target, and maintaining financial stability, which are macroeconomic indicators of the global financial system, has become a great challenge.
In the new era, this trio will be the most important issue to focus on.