Financial sector still a headache for central bank modellers
Macro-financial links are difficult to integrate into key models. But some central banks are making breakthroughs
The dynamics of the financial sector have always presented a challenge to economists. The sector is prone to sudden tipping points, from bank runs to flash crashes, which can be hard to anticipate. Links between the macroeconomy and financial sector form a feedback mechanism that can amplify shocks, potentially catching policy-makers unaware.
The global financial crisis and the Covid-19 recession have shown how integral financial variables are to macroeconomic outcomes – in the former case
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