But rather than await the market descriptions noted above, are there proactive steps that can improve the situation? The diagram shows a highly simplified picture of how the actions of households, businesses, banks and government feed into our balance of payments, in a way that over time drives our net international position.
15 Despite centuries of experience and observations of financial crises, it seems to be very difficult to strike the right balance and address this pro-cyclicality. In this context, it seems to me that central banks have a “franchise” in assuming this role. They do not have vested interests and can provide for “stability” in the long term.