Volatility is Here to Stay — Some Thoughts on Its Implications

Summary

In a complex and changing world, stability in the sense of no overall volatility in the economy is not achievable. Neither international economic cooperation nor a transactions tax can eliminate volatility on financial markets. Because volatility is here to stay, central bankers, legislators and market participants have to make further efforts to deal with its implications. Although central banks have managed to reduce inflation significantly in recent years, they must keep up, or even increase, their efforts to fight inflation. Integral to fulfilling the core function of central banks “promoting price stability” is the need to understand the causes and implications of market volatility and to build up or to maintain credibility. Because it is a pure act of faith to believe that the consequences of volatility, unpleasant as they may be at times, could efficiently be prevented by regulation, any new calls for regulation should at least be treated with a good dose of scepticism. What is really needed in regard to regulation is the strengthening of market discipline and personal responsibility to the greatest extent possible. If market forces rather than regulation are to provide the basic control mechanism for risk-taking activities, the market must be able to assess the risks incurred by firms. Legislators and regulators should therefore increase their efforts to improve accounting standards, while market participants are encouraged to disclose more information about their risk exposures.