The Effectiveness of Monetary Policy and Financial Stability: Critical Perspective from South Mediterranean Countries

This paper examines the relationship between the effectiveness of monetary policy and financial stability for south Mediterranean economies. The study employs annual panel data ranging from 2000-2022 for a set of variables (Z-Score, money market interest rate, GDP growth, consumer price index and real effective exchange rate). Cointegration analysis suggests no long-term relationships among the variables, leading to the use of a Vector Autoregressive (VAR) model to capture short-term dynamics. Results indicate that changes in interest rates have a negative impact on financial stability, affecting borrowing costs, debt servicing and asset valuations, However, GDP growth indirectly influences financial stability. Fluctuations in consumer prices can impact financial stability through inflationary pressures and monetary policy measures. While, changes in the real effective exchange rate affect export competitiveness, external debt burden, and overall macroeconomic stability. The study suggests that by understanding the short-term interdependencies and the effects of external factors, policymakers and financial institutions can make informed decisions to promote and maintain stability in the financial system.