The next generation of policy models will hopefully be enriched in this dimension, capturing the complexity of the underlying linkages between economic behaviour and financial variables in much the same way that ToTEM made such a significant advance with respect to terms-oftrade shocks.
And it is also able to use macroprudential policies to temper swings in the leverage cycle – for example through the release of countercyclical capital buffers. This means that monetary policy transmission should be more immune from disruption, and interest policy should not be overburdened over the cycle with the objective to avoid and then eliminate asset price bubbles.