Still, neither the models nor the actual risk positions are now, or are likely to be, as similar as assumed by observers concerned about the negative implications of model-based risk management.
By cutting interest rates to offset the negative effects of financial turmoil on aggregate economic activity, monetary policy can reduce the likelihood that a financial disruption might set off an adverse feedback loop. The resulting reduction in uncertainty can then make it easier for the markets to collect the information that facilitates price discovery, thus hastening the return of normal market functioning.