Financial frictions, for example, were largely absent from mainstream central bank models.6 Generally speaking, there was a lack of attention to “financial plumbing” – to the fact that differences in liquidity, capital and supervisory standards meant that banks’ reaction to shocks could magnify heterogeneity.7 The creation of the banking union has fixed many of these shortcomings, but not all of them.
In particular, without further private risk-sharing, idiosyncratic shocks will continue to cause persistent dispersion in economic outcomes. You can see this clearly on my next slide.