Such painful outcomes are more likely when financing mechanisms are opaque, when intermediation occurs without an effective liquidity backstop, when assets are less liquid, and when financial leverage is layered on top of structural leverage.2 These dynamics were evident during the financial crisis.
Enhancing our Framework and Communications For monetary policy, so-called ‘neutral interest rates’ provide a sense for whether the current settings for interest rates are expansionary or contractionary. In a world where macroprudential tools have turned out to be a more permanent feature of the landscape than we initially expected, we think that it is important to consider and explain the neutral macroprudential settings.