Conference Explores Relationship of Markets, Institutions
Since 1985, the economy has been more stable than it was in the 25 preceding years, though the reasons for that stability are not entirely clear, Fed Vice Chairman Roger Ferguson said in the keynote speech at an April conference of the Federal Reserve Bank of Atlanta.
Speaking at the conference “Modern Financial Institutions, Financial Markets, and Systemic Risk,” which was organized by the Atlanta Fed and the International Association of Financial Engineers, Ferguson cited four leading explanations for reduced economic volatility: milder economic shocks, improved inventory management, better monetary policy, and more widely available credit, even during downturns, because of financial innovations such as improved risk assessment and risk-based pricing.
Examining the explanations
Ferguson, who resigned from the Board of Governors on April 28, said the first of those explanations seems less persuasive after the considerable economic shocks of the late 1990s and early 2000s. However, he believes that improved inventory management and more widely available credit have played a role in economic stability.
While discussing monetary policy’s contribution to economic stability, Ferguson said he believes monetary policy has indeed improved. “We are better at understanding how the economy operates—and, therefore, at evaluating the appropriate stance of monetary policy—and we are more determined to pursue the goal of price stability,” he said.
Systemic risk receives scrutiny
During the conference, academics, practitioners, and policymakers discussed systemic risk arising from the interactions of financial institutions and financial markets. In addition to Ferguson, newly installed Federal Reserve Governors Kevin Warsh and Randall Kroszner each chaired a session. Other speakers included Emil Henry, the Treasury assistant secretary for financial institutions, and Nigel Jenkinson, the director of financial stability at the Bank of England.
Papers presented at the conference included examinations of hedge funds and how they compare to mutual funds in stock picking and investment success, the implications of certain types of currency trades for speculative dynamics, and a session on how market makers provide liquidity during financial disruptions, all of which are key concepts when considering financial markets and systemic risk.