Towards An Operational Framework For Financial Stability: "Fuzzy" Measurement And Its Consequences

Date Added: Jan 2010
Format: PDF

Over the last decade or so, addressing financial instability has become a policy priority. Despite the efforts made, policymakers are still a long way from developing a satisfactory operational framework. A major challenge complicating this task is the "Fuzziness" with which financial (in)stability can be measured. The authors review the available measurement methodologies and point out several weaknesses. In particular, they caution against heavy reliance on the current generation of macro stress tests, arguing that they can lull policymakers into a false sense of security.