Advertisement

Developing a Financial Stability Model for Mauritius

  • Indranarain Ramlall
Chapter

Abstract

The objective of this chapter is to develop a financial stability model for Mauritius. Indeed, in light of the crisis, there had been an increasing need to generate financial stability models to gauge the different risks likely to impact on both the economic and financial fronts of an economy. This chapter develops a broad financial system strength index model for Mauritius. The results show that Mauritius had been affected the crisis with the costs of undermined output standing in the range of 3.4–5.4%. Latent risks are noted under different channels, namely, public debt sustainability, tourist arrivals and earnings, central bank equity, quality of balance of payments sustainability, trade finance, net foreign investments on the Stock Exchange of Mauritius and future GDP growth paths in Europe and the USA. Findings further show the existence of an ineffective interest rate channel, a robust credit transmission channel and a vibrant exchange rate channel under the Monetary Condition Index. Interestingly, Mauritian banks’ profitability structure is found to have been unaffected by the crisis on the back of a maintained interest rate spread at 7% in spite of a fall in the TED spread. Policy-wise, the authorities should focus on the tourism and credit channels while scaling down the exorbitant interest rate spread to boost the effectiveness of monetary policy. In fact, the high interest rate spread may be acting like a hurdle in insulating the interest rate channel of monetary policy transmission mechanism in Mauritius.

Keywords

Interest Rate Monetary Policy Banking Sector Stress Index Capital Inflow 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Bibliography

  1. Balakrishnan, R., Danninger, S., Elekdag, S., & Tytell, I. (2009, April). How linkages fuel the fire: The transmission of financial stress from advanced to emerging economies. In World Economic Outlook. Washington, DC: International Monetary Fund.Google Scholar
  2. Bell, J., & Pain, D. (2000, December). Leading indicator models of banking crises-a critical review. Bank of England Financial Stability Review, pp. 113–129.Google Scholar
  3. Berger, A. N., Herring, R. J., & Szego, G. P. (1995). The role of capital in financial institutions. Journal of Banking and Finance, 19, 393–430.CrossRefGoogle Scholar
  4. Bloom, N. (2009). The impact of uncertainty shocks. Econometrica, 77(3), 623–685.CrossRefGoogle Scholar
  5. Bordo, M., Eichengreen, B., Klingebiel, D., & Martinez-Peria, M. S. (2001). Is the crisis problem growing more severe? Economic Policy, 16, 51–82.CrossRefGoogle Scholar
  6. Borio, C., & Lowe, P. (2002). Asset prices, financial and monetary stability: Exploring the nexus (BIS working papers 114). Basel: Bank for International Settlements.Google Scholar
  7. Brave, S. A., & Butters, R. A. (2010). Gathering insights on the forest from the trees: A new metric for financial conditions (WP 2010-07). Federal Reserve Bank of Chicago.Google Scholar
  8. Cardarelli, R., Elekdag, S., & Lall, S. (2009). Financial stress, downturns, and recoveries (IMF working papers 09/100).Google Scholar
  9. Cardarelli, R., Elekdag, S., & Lall, S. (2011). Financial stress and economic contractions. Journal of Financial Stability, 7(2), 78–97.CrossRefGoogle Scholar
  10. Caruana, J. (2010, February). Systemic risk: How to deal with it? (BIS research paper).Google Scholar
  11. Davig, T., & Hakkio, C. (2009). Financial stress: What is it, how can it be measured, and why does it matter? Federal Reserve Bank of Kansas City. Economic Review.Google Scholar
  12. Davig, T., & Hakkio, C. S. (2010). What is the effect of financial stress on economic activity. Economic Review, issue Q, II, 35–62. Federal Reserve Bank of Kansas City.Google Scholar
  13. De Larosiere, L., Balcerowicz, L., Issing, O., Masera, R., McCarthy, C., Nyberg, L., et al. (2009). The high-level group on financial supervision in the EU. Brussels: European Commission.Google Scholar
  14. Demirgüç-Kunt, A., & Detragiache, E. (2011). Basel core principles and bank soundness: Does compliance matter? Journal of Financial Stability, 7(4), 179–190.CrossRefGoogle Scholar
  15. Eichengreen, B., Rose, A. K., & Wyplosz, C. (1995). Exchange market mayhem: The antecedents and aftermath of speculative attacks. Economic Policy, 21(October), 249–312.CrossRefGoogle Scholar
  16. Erbil, C., & Salman, F. (2006). Revealing Turkey’s public debt burden: A transparent payments approach. Journal of Policy Modeling, 28(7), 825–835.CrossRefGoogle Scholar
  17. Estrella, A., & Mishkin, F. (1998). Rethinking the role of NAIRU in monetary policy: Implications of model formulation and uncertainty (Research paper 9806). New York: Federal Reserve Bank of New York.Google Scholar
  18. European Central Bank. (2009, December). Box i: A global index of financial turbulence. Financial Stability Review.Google Scholar
  19. Frankel, J. A., & Rose, A. K. (1996). Currency crashes in emerging markets: An empirical treatment. Journal of International Economics, Elsevier, 41(3–4), 351–366.CrossRefGoogle Scholar
  20. Grimaldi, M. B. (2010). Detecting and interpreting financial stress in the euro area (Working paper series no 1214/June 2010). European Central Bank.Google Scholar
  21. Hakkio, C. S., & Keeton, W. R. (2009). Financial stress: What is it, how can it be measured, and why does it matter? Economic Review, Issue Q, II, 5–50. Federal Reserve Bank of Kansas City.Google Scholar
  22. Hanschel, E., & Monnin, P. (2005). Measuring and forecasting stress in the banking sector: Evidence from Switzerland. In Investigating the relationship between the financial and real economy (Vol. 22, pp. 431–449). Basel: Bank for International Settlements.Google Scholar
  23. Hatzius, J., Hooper, P., Mishkin, F., Schoenholtz, K., & Watson, M. (2010). Financial conditions indexes: A fresh look after the financial crisis (No. 16150). NBER Working Papers from National Bureau of Economic Research, Inc.Google Scholar
  24. Holló, D. (2012). A system-wide financial stress indicator for the Hungarian financial system (No. 2012/105). MNB Occasional Papers from Magyar Nemzeti Bank (Central Bank of Hungary).Google Scholar
  25. Hollo, D., Kremer, M., & Lo Duca, M. (2012). CISS – A composite indicator of systemic stress in the financial system (European Central Bank working paper series No. 1426). Frankfurt am Main: European Central Bank.Google Scholar
  26. Illing, M., & Liu, Y. (2003). An index of financial stress for Canada (Working papers 03-14). Ottawa: Bank of Canada.Google Scholar
  27. Illing, M., & Liu, Y. (2006). Measuring financial stress in a developed country: An application to Canada. Journal of Financial Stability, 2, 243–265.CrossRefGoogle Scholar
  28. Kaminsky, G., & Reinhart, C. (1999). The twin crises: The causes of banking and balance-of-payments problems. American Economic Review, 89, 473–500.CrossRefGoogle Scholar
  29. Kaufman, G. G., & Scott, K. E. (2003). What is systemic risk, and do bank regulators retard or contribute to it? The Independent Review, 7(3), 371–391.Google Scholar
  30. Kliesen, K. L., & Smith, D. C. (2010). Measuring financial market stress (Economic synopses). St. Louis: Federal Reserve Bank of St. Louis.Google Scholar
  31. Kota, V., & Saqe, A. (2013). A financial system stress index for Albania (Working paper 03(42)). Albania: Bank of Albania.Google Scholar
  32. Mishkin, F. S. (1992). Is the fisher effect for real?: A re-examination of the relationship between inflation and interest rates. Journal of Monetary Economics, Elsevier, 30(2), 195–215.CrossRefGoogle Scholar
  33. Nelson, W. R., & Perli, R. (2007). Selected indicators of financial stability. Irving Fisher Committee’s Bulletin on Central Bank Statistics, 23, 92–105.Google Scholar
  34. Oet, M., Eiben, R., Bianco, T., Gramlich, D., & Ong, S. (2011). The financial stress index: Identification of systemic risk conditions (Federal Reserve Bank of Cleveland, working paper 11–30). Cleveland: Federal Reserve Bank of Cleveland.Google Scholar
  35. Osborne-Kinch, J., & Holton, S. (2010). A discussion of the monetary condition index (Quarterly Bulletin 01, pp. 68–80). Dublin: Central Bank and Financial Services Authority of Ireland.Google Scholar
  36. Ramlall, I. (2014). Is there a pecking order in the demand for financial services in Mauritius? Journal of African Business, 15(1), 49–63.CrossRefGoogle Scholar
  37. Ramlall, I. (2015). Mauritius financial system stress index: Estimating the costs of the subprime crisis. Journal of African Business, 16(3), 235–271.CrossRefGoogle Scholar
  38. Reinhart, C., & Rogoff, K. (2009). The aftermath of financial crises (No. 14656). NBER Working Papers from National Bureau of Economic Research, Inc.Google Scholar
  39. Sandahl, J. F., Holmfeldt, M., Rydén, A., & Strömqvist, M. (2011). An index of financial stress for Sweden. Sveriges Riksbank Economic Review, 2011(2), 49–67.Google Scholar
  40. Tsangarides, C. (2010). Monetary policy transmission in Mauritius using a VAR analysis (WP/10/36). International Monetary Fund.Google Scholar
  41. Van den End, J. W. (2006). Indicator and boundaries of financial stability (Danish National Bank working paper no. 097/2006).Google Scholar
  42. Van Roye, B. (2014). Financial stress and economic activity in Germany. Empirica, 41(1), 101–126.Google Scholar

Copyright information

© The Author(s) 2017

Authors and Affiliations

  • Indranarain Ramlall
    • 1
  1. 1.University of MauritiusMokaMauritius

Personalised recommendations