Monetary policy should respond to risk-taking
Unless monetary policy regimes respond to increased levels of risk-taking by market participants, fluctuations in the business cycle might be amplified in future, argues a paper from the Bank for International Settlements.
The paper finds that as the measurement, management and pricing of risk became central to financial market activity, the feedback between perceptions of value and risk became more prominent and that this had an impact on the transmission mechanism of monetary policy.
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