First is the financial institutions risk management practices including liquidity management, stress testing, and assessment of counterparty risk. Second, the FSF group is also probing valuation and risk disclosures, including the role of credit-rating agencies. Third, it is re-examining the principles and practices of prudential oversight, particularly with respect to off-balance-sheet exposures.
While monetary policy in practice must confront real-world complications that theoretical models ignore, the crucial point is that economic projections for growth and inflation under appropriate monetary policy may be much less affected by adverse or positive “demand” fluctuations than would be the case if policy did not respond appropriately to these developments.