The earliest theoretical research suggested taking small steps was most appropriate, but subsequent research has found a range of circumstances where it is appropriate to make large and rapid changes in the policy stance, highlighting that the answer depends on the specific circumstances.5 While the academic literature is mixed, there is, however, a long tradition among central banks globally of applying a risk management approach to monetary policy decisions under uncertainty.6 Although most of the time actions will be based on the central bank’s view of the most likely outcome for the economy, a common feature of these risk management approaches is that policy will occasionally be set to mitigate the risk of a very bad outcome for the economy that threatens the central bank’s ability to achieve its mandate.
This has made compliance with the rules an increasingly costly, time-consuming and complicated undertaking. Regulatory complexity has now emerged as a very stiff challenge indeed. The international Basel regimes have become ever more comprehensive and intricate.