I would like therefore to consider two issues here: •  Firstly, experience suggests that financial cycles may have recently tended to amplify relative to business cycles; what are the driving factors behind this move;  BIS Review 41/2001  1  •  Secondly, what are the possible policy implications of this development, from both a monetary and financial stability perspective. 1. Experience suggests that financial cycles have recently tended to amplify relative to business cycles. A. What are the major features of these amplified financial cycles? Let us first consider credit cycles. There is no doubt that the amplitude of credit cycles is usually larger than that of business cycles. What is however noticeable here is that, over the last three decades, business cycles have been less frequent and less amplified while credit cycles have tended to remain fairly marked. Thus credit cycles have been amplifying in relative terms compared with business cycles. Asset price cycles have also become more pronounced even if the fixed interest rate markets have a tendency to be somewhat contra-cyclical. •  In the last two decades market forces have indeed tended to cause clear misalignments between equilibrium and actual asset prices. Stock markets in particular have experienced this phenomenon. But in foreign exchange markets as well, prices have also tended to diverge substantially from their “equilibrium level”, although those divergences have been contained through fruitful GVII cooperation during the last 15 years. •  In addition, some markets have seen an increase in volatility and frequent volatility peaks.

Lowering the barriers to entering the financial sector, the free circulation of information and fiercer competition have also brought financial markets closer to a situation of pure and perfect competition, which is beneficial to all consumers. Last but not least, the growth of market financing has allowed savings to be channelled directly into investment. Reducing the share of bank financing, and consequently that of money creation, has enabled a less inflationary financing of the economy. Thus increased, monetary stability has produced tangible and positive effects and contributed decisively to a strong and sustainable growth of the world economy. Thus, these developments have resulted in increased monetary stability and a more efficient allocation of resources. However, while globalisation and financial integration have decisively contributed to improving overall economic efficiency, experience also suggests that financial cycles may have tended to amplify relative to business cycles over recent years. In particular, financial markets have experienced in some circumstances somewhat erratic developments. The rapid emergence of the "new economy" bubble in 1999 and early 2000 – followed by a series of sharp corrections – illustrated the potential of markets for providing funding to the real economy (particularly to the most innovative sectors); but it also demonstrated the tendency of markets to over-react, moving from excessive optimism to disproportionate pessimism, with the ensuing negative consequences for the behaviour of firms and households. As a result, financial authorities have been confronted with boom-bust episodes which must be carefully monitored, since they could affect global monetary and financial stability.