Economic resilience: a financial perspective

One aspect of resilience that is often underappreciated concerns financial imbalances. A resilient economy absorbs exogenous shocks and recovers quickly. But resilience also hinges on policies that contain the build-up of financial imbalances and mitigate the fallout of their correction, ie policies that tackle the financial cycle head on. This note discusses the nature of the financial cycle, its monitoring and the economic implications of booms and busts. It argues for a macro-financial stability framework, which accounts for both aspects of resilience. In this framework, prudential, monetary and fiscal policies complement each other in systematically leaning against the financial cycle.