“It’s awful. Why did nobody see it coming?” asked Queen Elizabeth II in November 2008 during a visit to the London School of Economics, wondering why nobody had predicted the Global Financial Crisis. The bewilderment wasn’t unique to the British monarchy; across the world, many asked the same question.
Ten years on, it remains difficult to forecast financial instability. However, progress is afoot to improve the understanding of important links between the financial sector and the economy. We now understand better how financial vulnerabilities can amplify negative shocks and hurt output and employment.
Twice a year, the IMF comes out with its latest analysis of global financial stability risks in the Global Financial Stability Report, where it continues to initiate improvements in a framework for financial stability monitoring.
The current approach, described in a new IMF paper, involves...
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