The systemic impact can be major, driving financial institutions, as well as sovereign borrowers into real difficulties. The result is a situation where policy-makers – including the central bank – may feel compelled to react to market developments with ever more powerful responses, in order to contain the a systemic risk and avoid a meltdown. What is the lesson?
Central banks have to face up to the public and market discourse – especially because they are independent. We have to participate in this debate. We have to take on the critics, understand their points, and argue our case. We have to listen, explain, and convince.