The latest data from the Bank for International Settlements showed that $ trillion of FX products were traded daily in 2016 – and the London market, the largest single centre, has grown by a third since then. That suggests that global FX turnover may now be more than 20 times the equivalent measure of global economic output, across an exceptionally wide range of products, participants and financial centres (Chart 1). For analysts, investors and policymakers, movements in floating FX rates provide a fast and comprehensive synthesis of market perceptions of economic news. And a huge empirical literature finds little evidence that excess returns are systematically predictable: a formal definition of ‘efficiency’. Even a harsh examiner would score FX markets ‘very good’ on this heading. Chart 1: The global FX market at a glance  Sources: London Foreign Exchange Joint Standing Committee April 2019 survey, Bank for International Settlements triennial surveys, Bloomberg LP, International Monetary Fund and Bank calculations. 3  All speeches are available online at www.bankofengland.co.uk/news/speeches  3  A resilient market is one in which markets continue to function in good times and bad, ensuring that prices give a consistently accurate signal about the balance of demand and supply. Again, the experience here is positive. FX markets have rarely ‘closed’.
9  A recent paper, by Charlie Bean, Matthias Paustian, Adrian Penalver and Tim Taylor, “Monetary policy after the fall”, Federal Reserve Bank of Kansas City Annual Conference, August 2010, shows that the monetary policy instrument and macroprudential instrument (a lump-sum levy/subsidy on the banking sector) are not perfect substitutes in a sticky-price New Keynesian macroeconomic model with a banking sector. 10  Charlie Bean et al, ibid. BIS central bankers’ speeches  9  The overlap between macroprudential and monetary policy is one rationale for giving the central bank a prominent role in the setting of macroprudential policy. In addition, many central banks already have some of the analytical skills that will be needed for conducting the policy. However, greater analytical capacity will need to be built up. Analytical tools must be developed to guide policy While we know that there is an overlap between macroprudential policy and monetary policy, we lack models that describe the relationship in much detail. It is a difficult task for a number of reasons: (a) in the models currently used by central banks, financial sectors are poorly modelled, so it is difficult to introduce financial instabilities; (b) developments in financial markets are sometimes driven by psychology, which is difficult to replicate in models with rational agents; (c) the risk of a crisis cannot be modelled in the usual way, as it is more like an extra channel in the transmission mechanism; and (d) policymakers want models that can give them guidance on when to act, which is extremely challenging.