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Opinion

GDP at risk

By Kim Schoenholtz and Stephen Cecchetti

schoenholtz article

We see GDP at risk as a big step forward for policymakers.

“[A] central bank seeking to maximise its probability of achieving its goals is driven, I believe, to a risk-management approach to policy. By this I mean that policymakers need to consider not only the most likely future path for the economy but also the distribution of possible outcomes about that path." - Federal Reserve Board Chairman Alan Greenspan, 29 August 2003.

Alan Greenspan’s remarks were obvious, even when he made them. For several decades, central bankers have been the key risk managers for the economy and the financial system. Unfortunately, just a few years after Greenspan spoke, it was clear that they had failed spectacularly; during 2007 and 2008, risks that were unaddressed turned into crisis.

The regulatory reforms since 2009 – capital and liquidity requirements, resolution regimes, restructuring of derivatives markets, and an evolving approach to systemic risk assessment and (macroprudential) regulation – have all been directed at improving the resilience of the financial system. As a result, the likelihood of another crisis-induced plunge in GDP is much lower today than it was a decade ago.

Read the full article as published by VoxEU.

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Kim Schoenholtz is the Henry Kaufman Professor of the History of Financial Institutions and Markets in the Economics Department and Director of the Center for Global Economy and Business.