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This chapter begins by exploring some of the most upsetting financial crises in recent memory and then proposes potential “shock absorbers” for the global financial system. Greater globalization and built-in redundancies are needed if we want to avoid replicating the problems of the past, and psychological resilience is required to navigate future problems. The authors propose synthetic and invasive stress tests of current financial institutions to identify possible instigators or fissure points for future financial crises, and they urge government officials to publicly acknowledge that some financial crises may be unavoidable. These mechanisms cannot completely eliminate crises, but they can better prepare the system for recovery.

This chapter looks at using the binary states describing the recurrent events to help in either constructing economic models of time series or evaluating the fit of such models. The chapter provides a general discussion of the issues that come up when using the binary states in regressions. It then turns to the analysis of complete economic models. In these it is very common to see variance decompositions computed and used to draw conclusions about which shocks are responsible for the recurrent events. It is shown that this methodology is flawed when it comes to shedding light on what causes the business cycle. What can be done is investigated in the chapter, which illustrates how to determine which shocks are important to a matching of the business cycle features discussed in Chapter 5. The discussion moves on to some economic models that have been constructed in the wake of the global financial crisis and which aim to highlight the role of financial shocks.

this chapter discusses what the author calls the balance of payments dominance on macroeconomic policy, defined as a macroeconomic regime in which short-term dynamics is largely determined by external, mainly financial, shocks. Typically emerging market economies suffer from this dominance and are prone to boom-and-bust cycles led by external financial shocks.

The state of central banking is fragile and fraught with reasons to take a dim view of their stature. Low economic growth, an insufficiently unsubstantiated expansion of central bank responsibilities, and worries over future financial instability are sources of concern. Institutional and other objective measures point to a loss of confidence in the monetary authorities around the globe. Several central banks are unable to match words with deeds. The willingness of policymakers and central banks to take accountability seriously remains in doubt, at least in some of the most systematically important regions of the world. The financial crisis has awakened a desire to find a way to have central banks find a proper mix for conducting monetary policy and macroprudential policies. A decade after the crisis, no coherent new framework has emerged, and reforms have hardly dented an overall impression of disquiet about the state of central banking.