Benchmarks are also particularly important for derivatives such as interest rate swaps, which are critical tools of risk management. When benchmarks function as they should, they are a straightforward and technical element in the world of finance. They are intended to provide an unbiased, arm’s-length measure of underlying market prices. What went wrong?
During “bad times”, on the contrary, capital outflows cause depreciation and inflationary pressure, when financial sector imbalances are closing. From financial stability point of view traditional inflation targeting seems to be too loose when imbalances are building up, and too tight, when financial imbalances are closing.