A Systemic Approach to Financial Stability

At next month's Global Economic Symposium, world leaders will attempt to develop concrete solutions to today's most pressing economic problems, including monetary and financial instability. Designing effective proposals will require a new, more comprehensive understanding of the systemic factors affecting financial stability worldwide.

HONG KONG – Next month, policymakers, business leaders, academics, and civil-society representatives will meet in Kiel, Germany, for the Global Economic Symposium (GES), where they will attempt to develop concrete solutions to today’s most pressing economic issues. Whether they produce effective proposals will depend on a comprehensive understanding of the factors underpinning – and undermining – financial stability worldwide.

At last year’s summit, dialogues on central banking’s future, which pitted inflation targeting against financial stability, produced three solutions: central banks should adopt a counter-cyclical policy approach; a world monetary authority should be created to promote multilateral cooperation among central banks; and price stability must remain central banks’ primary goal. Although these solutions have some merit, they are inadequate to address effectively the complex and far-reaching failings that led to the 2007-2009 global financial crisis.

The crisis represented a comprehensive systemic failure, involving breakdowns at almost all levels, from macroeconomic theory to micro-level incentives to institutions. The economics profession (and institutions within the existing financial architecture, including regulators) had become excessively specialized, rigid, and self-interested. As a result, it could no longer account for the evolution of economic systems, with their constant adaptation of rules, tools, and behaviors.

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