In doing so, we aim not only to help make the financial system better able to withstand future shocks but also – by reducing the range of circumstances in which systemic stability concerns might prompt government intervention – to mitigate moral hazard and the problem of "too big to fail."
Portfolio models of financial intermediation2 suggest that the combination of inflation targeting and increased exchange rate volatility should foster the use of the local currency and discourage the use of the foreign currency. Preliminary econometric analysis of the Serbian data for the past three-years suggests that indeed there exists a relatively fast link between higher exchange rate volatility and a higher degree of dinarisation.