Macro, Asset Price, and Financial System Uncertainties

In this lecture, Paul Tucker, Executive Director for Markets and Monetary olicy Committee member, discusses three related 'arenas' of uncertainty concerning the impact of structural changes in the economy and financial system. Beginning with the macroeconomy and against the background of his vote at the Monetary Policy Committee's November meeting, he looks at the challenges confronting policymakers from supply-side changes in the United Kingdom such as migration and globalisation, and stresses that the response of policymakers depends crucially on whether medium-term inflation expectations are well anchored. After exploring possible explanations for the volatility of financial-asset returns having fallen by rather less than macroeconomic volatility, he considers the limited degree of forward-looking uncertainty about asset prices implied by financial option prices. Noting that part of the explanation may lie in developments in the structure of the financial system, and in particular the process of disintermediation of the banking system, he examines the implications for assessments of money and credit conditions and of the resilience of the financial system as a whole. Bringing those uncertainties together raises questions about how markets and the system would respond if some of the risks to the outlook were to crystallise. Though the answers are unknowable, he emphasises that central bankers must strive to maintain the medium-term credibility of monetary policy; and must understand today's global banking system and capital markets well enough to tell the difference between a problem requiring solely a macroeconomic response and a more complex financial stability problem