“Since the early 1990s, safeguarding financial stability has become an increasingly dominant objective in economic policy making.” G.J. Schinasi, 2006.
Explain what is meant by the term “financial stability” and discuss the underlying trends that have prompted policymakers to give greater emphasis to financial stability as an economic objective.
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Throughout decades the overall economy has become more and more complex, and faced a range of problems, which led to expansion of various economic and financial instruments necessary to prevent them. Central Banks have become extra aware of financial stability issue, which today is one of their core principles, along with price stability. The emergence of innovative instruments gave banks the opportunity to face current financial problems. However, the issue of uncertainty is still present, since it is not always possible for a financial system to be in a good condition. There is a wide range of aspects that overlap each other and cause disturbances within financial world and these need to be somehow prevented, yet if not prevented then minimized.
There was and still is a visible trend to address the term of financial stability, which although is a broad one and sometimes hard to define, moreover its analysis is still in formative years- has to be properly named. Therefore, in order to accurately define financial stability it is essential to classify financial instability as well, since they are strongly correlated. But I am sure that with time there will emerge more definitions of both of them since the financial system is in a constant development and improvement continuum.
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