Are We Again Taking Financial Stability for Granted?

Abstract

• Volatility in consumption and income may, under certain circumstances, have a significant negative impact on well-being, such that central banks' stabilizing policies may be very valuable. Volatility may have an impact on the path of growth, such that stabilizing policies also have an impact on growth.

• There is "bad" uncertainty, which must be guarded against, but there is also "good" uncertainty, which is reflected in innovation and technological improvements, research and development, and competition. We must maintain stability while enabling that good uncertainty.

• Stabilizing policy is particularly important to prevent financial crises, since the damage from such crises is significant. Therefore, the financial stability committee becomes a vital layer in the early identification of risks. The establishment of the committee is a very important step in view of the financial system reforms that are being formulated.

• The Bank of Israel advises the government on how to increase long-term growth, and indicates main policy measures in the areas of education, infrastructure, and bureaucracy that can increase the long-term growth path. The Bank is currently working diligently on a formal report containing the Bank's recommendations to the government regarding the advancement of productivity in the economy and an analysis of their expected costs and benefits in the long term.