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- Title
Uncertainty, the implementation of monetary policy, and the management of risk.
- Abstract
In a speech to the Association of Corporate Treasurers, Paul Tucker(1) — Executive Director for Markets and a member of the Monetary Policy Committee — discussed sources of volatility and uncertainty facing firms and financial markets. He explains that undesirable volatility in short-term sterling money market interest rates has, in the past, been a source of avoidable uncertainty for users of the sterling money markets such as banks, asset managers and corporate treasurers. And he outlines how the Bank's new framework for implementing monetary policy, introduced in May, aims to remove that uncertainty as far as possible. Turning to less easily avoidable risks facing businesses, he considers how uncertainty about how to manage pension fund asset-liability mismatches may have been one of a number of factors behind recent weakness in measures of UK business investment. Starting with a discussion of the wider effects on financial markets of funds' asset-liability management, he reviews arguments on whether or not risk may have been underpriced in capital markets. To the extent that structural factors may have lowered the price of risk, he notes that the consequent reduction in risk premia would broadly have a one-off effect on ex-post asset returns. Finally, he highlights some possible implications of recent innovations in structured finance, including whether the trade-off between the demand for financial engineering and for liquidity may switch in stressed conditions; and whether risk could flow back to the banking system in adverse circumstances.
- Subjects
UNITED Kingdom; MONETARY policy; TUCKER, Paul; UNCERTAINTY; RISK management in business; FINANCIAL markets; MONEY market; INTEREST rates
- Publication
Bank of England Quarterly Bulletin, 2006, Vol 46, Issue 2, p202
- ISSN
0005-5166
- Publication type
Article