Clearly, there is no way to get precise answers to these questions. But we need to understand how developments in the financial system affect the real economy and the risks it faces. I spoke on this topic almost four years ago during a lecture at Western University.
I talked about the idea of developing a grand synthesis—a utopian economic model capturing how the financial system would affect the real economy and vice versa, and helping us deliver on our inflation-control mandate. We may never reach that utopia. But the good news is that we have made significant progress. Let me mention three important improvements.