(1935), The General Theory of Employment, Interest and Money, Cambridge: Harcourt, Brace and Company. Maddison, A. (2009), Historical Statistics on World Population, GDP and Per capita GDP, 1-2006 AD, updated March 2009 in http://www.ggdc.net/maddison. Mankiw, N.G. (2006), “The Macroeconomist as Scientist and Engineer,” Journal of Economic Perspectives 20(4): 29-46. BIS Review 112/2009  7  Medina, J.P. and C. Soto (2007), “The Chilean Business Cycles through the Lens of a Stochastic General Equilibrium Model,” Working Paper N°457, Central Bank of Chile. Rajan, R. (2006), “Has Financial Development Made the World Riskier?,” in The Greenspan Era: Lessons for the Future, Proceedings of the Jackson Hole Symposium 2005, Federal Reserve Bank of Kansas City. Rose, A. and M. Spiegel, (2009), “Cross-Country Causes and Consequences of the 2008 Crisis: Early Warning,” CEPR Discussion Paper N°7354. 8  BIS Review 112/2009
In this context, the “triangle of vulnerability”, identified in the December 2006 FSR, connecting the state of the credit cycle, credit derivatives and highly leveraged institutions, could have grown in relevance in the recent period. A shock involving any element of this triangle could have implications for the other two. For example, a sharp turn in the credit cycle could mean that credit risk protectionsellers, such as hedge funds, would have to make payments to banks which are protection-buyers, but hedge funds might not be capable of paying. Although many hedge funds have attempted to extend their investor lock-up periods, their positions are typically marked-to-market, implying that their funding remains vulnerable to any losses suffered because it could significantly impact on the willingness of banks to continue to grant credit. At the same time, a turn in the credit cycle could represent a challenging test for the functioning of the credit derivatives markets. Similarly, if widespread problems were to emerge in hedge funds active in credit risk transfer markets, this could spark a downturn in the credit cycle itself, as it could impair the “originate and distribute” business model upon which large banks have become reliant. 6. Overall assessment of the financial stability outlook  Let me now conclude with the overall assessment of the financial stability outlook.