However, the crisis crystallized the view that financial stability and the outlook for economic growth and inflation are intrinsically linked. As a result, the Bank of Canada – like many other central banks – is reconsidering how to better integrate financial stability and monetary policy objectives.
Not surprisingly, the efficient market hypothesis spurred furious model building based on the assumption that the distribution of risk is captured by the Gaussian bell curve. The spectacularly, albeit briefly, successful Black-Scholes model for option pricing too was based on the normal distribution of risk and ignored the possibility of extreme events. 21.