That is, the Ministry of Finance became the banks’ counterparty in the swap arrangement. We thereby avoided an expansion of the central bank’s balance sheet while improving the liquidity and funding situation of our banks. The most recent global financial crisis has taught us that it is vital to focus on the financial system as a whole, and not only on its components. Many of the risks that played a role in the recent crisis were identified by central banks and international financial institutions. However, not enough attention was paid to the ways in which these risks were interconnected and how they reinforced each other. System-wide risk amplified the financial crisis and its global repercussions. An international response to the management of systemic risk has been to introduce macroprudential regulation. BIS central bankers’ speeches  1  However, incorporating systemic oversight in the financial stability framework poses considerable analytical and operational challenges for most countries. Indeed, we as economists have relatively limited understanding of the design and effectiveness of macroprudential policies. But, even when inflation targeting was introduced, not much was known about how to go about implementing it. Practice and research developed in parallel, interacting. We hope to see similar developments regarding macroprudential policies. To this end, Norges Bank, like many other national and international monetary authorities, is actively working to further develop the conceptual and analytical foundations for macroprudential policy.
This multiplier lies between the estimates published by the Fed for the two variants of their FRB/US model: one in which expectations are formed using a VAR and the other in which they are model consistent. In the former, a 1 percentage point shock to the federal funds rate boost GDP by around ¾%; in the latter, the same shock boosts GDP by around 1½%. 12  All speeches are available online at www.bankofengland.co.uk/news/speeches  12  That seems a bit extreme, since the US and China are far less closely integrated through trade, financial and labour market linkages than are the UK and the EU. For example, 45% of the UK’s trade is with the EU, while under 20% of the US’s trade is with China and only 7% of China’s trade is with the US. It is possible that concerns about still-quiescent inflation in major economies and the related risk of a global liquidity trap are contributing to the recent large moves in interest rates. In the US, core PCE inflation fell back below the FOMC’s 2% target earlier this year. In the euro area, core inflation has been hovering around 1% for much of the past five years. For both economies, market measures of long-term inflation expectations have drifted down over the past year (Chart 10).