Such a situation may heighten the peak of the business cycle, but it also deepens the trough thereafter as additional adjustment is needed to compensate for the overshooting. However, these kinds of large swings in the business cycle are unlikely to occur in the current economic recovery, owing to the cautious behavior of firms.
For example, there are currently no readily available and widely accepted metrics of systemic risk to help calibrate instruments or gauge policy performance, even ex post, with much precision.1 The transmission mechanism of macroprudential policies need to be better understood and modelled. Similarly, interaction between liquidity coverage ratio (LCR) and monetary policy is an area which is still being examined.