Furthermore, this intrinsic volatility interacts with the difficulty of forming reliable beliefs in such an environment, with the dynamics of expectations constituting another mechanism driving macro-financial dynamics (Gennaioli and Shleifer 2018).4  It follows that the design of a stability-orientated macro-financial framework should seek to weaken amplification mechanisms and reinforce dampening mechanisms in relation to cyclical shocks.
In terms of execution, this is especially tricky for volatile economies, since it is typically difficult to tell apart trend shocks and cyclical shocks. For instance, if there is an improvement in the underlying sustainable growth rate of the economy, a persistent current account deficit can be desirable in terms of smoothing the funding of associated investment and consumption patterns.