Policy makers, therefore, tend to rely on a suite of modes to make their own judgements about policy action. The department should develop an independent policy model, to help understand the transmission of the policy signals to the real and financial sector. This will facilitate assessment of the medium-term impact of various policy variables and how they are informed by changes in macro-conditions.
Governments for their part have organised a second line of defence against what I have called “systemic solvency risk”. Key measures have included recapitalisations, guarantees and asset support schemes. The Eurosystem has issued recommendations on the appropriate framework for both government guarantees and recapitalisation measures. The aim is to support the banking sector in a way that avoids creating distortions in the Single Market.