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Paragraphs to ponder

February 22, 2011 Leave a comment

“To assess the impact of a financial crisis, one needs to make some assumptions about
the size of its initial effect on incomes (GDP) and their persistence. We make the
same assumptions as in the Bank of England‟s FSR (June 2010), this is that if a
banking crisis occurs, GDP falls initially by 10% and three quarters of this reduction
lasts for just five years whilst one quarter is permanent. Based on that assumption,
and a discount rate of 2.5%, the present value gain of permanently reducing the
likelihood of a systematic crisis in any one year by one percentage point is around
55% of current annual GDP.”

I would say the entire BoE paper is worth reading, but that’s probably only true if you are a financial regulation geek like me.

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Categories: Policy