Market participants used evaluation models that did not account properly for an additional dimension to risk. The distribution of returns depends on which “state of nature” prevails, for example if we are in normal market times or in crisis times. Very small changes in beliefs can translate into large changes in behaviour, which in turns have large effects on markets.
Indeed, as we reiterated following the 2021 strategy review, we base our monetary policy decisions, which include an evaluation of the proportionality of those decisions and their potential side effects, on an integrated assessment of all relevant factors. We will continue to do that. While monetary policy has important consequences for the entire economy, not every household will be affected in the same way.