From today’s perspective, the Great Moderation, the era of remarkable macroeconomic performance started in the mid-1980s, appears surprisingly remote. Monetary policy makers have had to adapt quickly to the present macroeconomic and financial environment, which can be best characterised by the concept of non-measurable risk, or “Knightian” uncertainty.
As you know, the economist Frank Knight developed a distinction between “risks” ( to which probabilities can be assigned), and “uncertainty” (for which even these probabilities are unknown). The very sharp increase in uncertainty that is typical of periods of financial instability had immediate consequences in the risk premia that lead to a strong preference for safe and liquid assets.